Investors are always searching for the best ways to improve their portfolio returns. In the financial markets, there are actually many ways you can use to achieve that goal.
The following are some of the best pro tips that you can use to see some improvements on your portfolio’s returns.
Stocks vs. Bonds
Stocks have historically performed better than other asset classes. So, even though equities sport higher amounts of risks than bonds, having a manageable proportion of the two assets can prove to be beneficial.
Choosing between stocks and bonds isn’t an either-or question. You just have to find the right mix to reflect your risk tolerance, goals, and investing personality.
Small vs. Large Businesses
If you look at some historical data, you will likely see that the small-cap companies usually outperform large-cap companies in both the US markets and international markets.
Smaller companies have higher risks than large companies over time because of their size. They have smaller operations, lower number of employees, and minimal track records.
On the other hand, investment portfolios that are inclined to small-to-medium-sized companies have historically offered higher returns than portfolios with a bias to large-cap companies.
The way you invest in your portfolio directly affects the costs of your investments and the bottom-line investment return that you can put in your pocket.
The two main ways to invest in a portfolio are active and passive management.
Active management is usually much more expensive than passive management. That’s because it needs insights of high-priced research analysts and even economists.
Meanwhile, passive management is usually for minimizing investment costs and avoiding the negative effects of failing to predict future market movements.
Choosing Value or Growth
Because you can track indices, value companies have outperformed growth companies in both the US and international markets.
Experts and professionals call this the “value effect.” As a result, a portfolio that inclines toward value companies has historically dished out higher investment returns.
Growth stocks usually have higher stock prices. These stocks are usually healthy, fast-growing companies that commonly have little worry about dividend payouts.
Meanwhile, value companies have lower stock prices relative to their accounting metrics like book value, earnings, and sales.
Diversification is simply not putting all your eggs in one basket. You put multiple asset classes that are different in nature to a portfolio. You also give an appropriate percentage allocation to each class.
And because asset classes have different correlations with one another, an efficient mix can drastically reduce the overall portfolio risk and enhance the investment return.
Commodities like wheat and oil are popular for their low correlation to stocks. Therefore, owning them may help lower the overall risks of your portfolio and improve returns.
Over the longer term, your portfolio will change and will deviate from the original asset class percentages. You should, of course, put it back in line with the targets.
You can accomplish rebalancing in three general ways. One is to add cash to the underweighted portion of your portfolio. Another is to sell a portion of the overweighted piece and transferring the cash to the underweighted one. Lastly, you can simply take withdrawals from the overweighted ones.