5 Strategies To Improve Your Portfolio Returns
Investing is a tough business to get into and requires a great deal of knowledge to deal with the unexpected. When you are already financially savvy, maximizing the returns for your portfolio are almost second-nature. But what is it that financial gurus and money-hungry investors do to make sure they’re getting back everything they can?
Here are a couple of ways you can improve the returns on your current portfolio or begin to maximize returns as you begin to invest:
1. Asset Allocation
Whatever you invest your money in, it’s important to make sure that funds are distributed evenly across your different investments. Things like one’s financial situation, risk tolerance, and time horizon are all things every investor should be mindful of. Making sure you factor that is the best way to generate positive long-term performance.
What are your financial goals? What are you planning on saving? What are you planning on spending? Have you considered risk tolerance and risk needs, time horizon, and your emergency fund? “This information is used to determine a required rate of return, which in turn leads to a prudent long-term asset allocation between risky assets (stocks), less risky assets (bonds) and no risk assets (cash),” says Forbes.com
Rebalancing is an important part of maintaining those returns. Even if your investments were in the positive at the time, stocks and bonds will sometimes change in value, forcing you to re-allocate your funds.
Re-allocating will make sure that you don’t suffer from an imbalance of risk and return. According to Forbes, “the goal of a rebalancing strategy is to maintain targeted risk rather than maximize return. Rebalancing puts a portfolio back on track.”
3. Control Cost
John Bogle, the founder of Vanguard, knows from experiences what happens when costs go out of control. Consider the cost of your management fees and the cost of trading your stocks.
“Every dollar paid for taxes is a dollar less of potential return. The cost of an adviser also matters.” When you need someone else for financial advice and investment management, which means less return from your well-structured portfolio. A good way to cut costs may be to learn the ropes of investment management yourself, thereby taking down cost and increasing your returns at the same time.
“Low-cost index funds and exchange-traded funds (ETFs) that track market indexes are an excellent way to keep fund expenses down.”
4. Manage Taxes
Forbes tells us there are three ways taxes are categorized: asset location, tax-loss harvesting, and withdrawal strategy in retirement.
“Asset location is the practice of allocating different investments across different types of accounts based on tax efficiency.” You’ll want the funds most tax-efficient to be in any taxable accounts you have and anything that suffers due to taxes in a tax-deferred account.
Used by many investors and widely promoted in many media outlets, there are still a handful of pros and cons to handling things this way.
“Tax-loss harvesting is a way to make an investment portfolio work harder by generating potential tax savings.” Investors doing this by selling at a lost, giving them the opportunity to get a tax deduction from the total owed taxes. With the purchase of an alternative fund, “the tax-loss can be used to offset future gains, and up to $3,000 per year can be used to offset ordinary income.”
“Withdrawal order is a tax-management strategy for retirees.” No matter how you choose to retire, retirement plans typically fall into a tax-deferred IRA, 401(k), tax-free Roth IRA, or personal savings account.
Regardless of which plan you have, each may carry a penalty depending on the frequency and size of withdrawals. Be smart about how much you withdraw from your savings to ensure you don’t have to pay back some of what you took out. Having a plan for how you do it is the best way to ensure you don’t have to pay too much back in taxes.
Investing is like any other profession that makes people money. To get the most out of it takes true discipline. Sure, it’s possible to develop a sound strategy on how to invest and allocate your funds, but how dedicated are you sticking by those plans?
Changing to a new strategy before knowing if the first works can cost you thousands. A successful investor is mindful of their feelings and doesn’t let themselves be influenced during a bear market.