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Summary
- All investors look for ways to maximise their portfolio returns.
- However, getting best returns is not only about finding and purchasing best assets.
- It involves timeless investing strategies that can not only boost returns but also keep costs low.
All investors look for ways to maximise their portfolio returns. However, getting best returns is not only about finding and purchasing best assets.
It involves timeless investing strategies that can not only boost returns but also keep costs low. Thus, it is critical to know how to allocate different assets to keep your portfolio performing.
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Here are five strategies to boost your investment portfolio returns:
Equity-bond balance
Even as stocks come with higher risks, experts advise to keep a manageable balance of equities and bonds in an investment portfolio. Such a combination has higher chances of delivering better return with low volatility. If average inflation-adjusted returns are considered, stocks are better performers compared to bonds. Thus, equity investing can help increase returns to make investing a rewarding venture.
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Smaller firms may help
Historically, an investment portfolio with small to midsize companies have delivered higher returns compared to the one packed with large-size companies. It has happened despite smaller firms carrying higher risk than larger firms. According to this small-cap theory, international small companies have consistently outperformed international large companies in terms of returns over last many decades.
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Value vs growth companies
Value companies have outperformed growth companies ever since index trading has been in existence. Experts refer to this as ‘value effect.’ An investment portfolio with higher contribution of value firms compared to growth firms has historically provided higher investment returns. Several value companies offer an annual dividend payout for investors, which adds to the gross return of investors. It may help if the stock price has a slow appreciation for the particular year.
Diversify portfolio
Investors can look to diversify their portfolio by adding multiple asset classes that are different in nature such as stocks, REITs, commodities, global bonds, etc. However, investors must maintain an appropriate percentage allocation to each class.
An efficient mix can help to cut down overall portfolio risk and increase expected return. Different asset classes have different correlation with each other. For instance, commodities have a low correlation to stocks. These can help to bring down the overall portfolio risk and enhance expected returns.
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Rebalancing the portfolio
It has been commonly seen that an investment portfolio drifts away from its original asset classes with time. Thus, it is critical to rebalance the portfolio. A 50/50 stock-to-bond mix could easily become a 60/40 stock-to-bond mix following a strong market rally.
Investors can achieve rebalancing by adding fresh cash to the under-weighted portion of the portfolio, selling a part of the over-weighted piece, and adding this to the under-weighted class, or taking withdrawals from the over-weighted asset class.
Managing expenses also plays a major role as it has a direct impact on the cost of your investments. Active management is significantly costlier than passive investing. Generally, the annual expense difference between active and passive management stands at nearly 1%.
Implementing the above-mentioned strategies such as value and size effect could add to an investor's annual return. Investors should also closely track the portfolio expenses, since lowering these costs could further add to returns.
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