6 Ways To Optimize Your Existing Investments
by Sourav Ganguly Investing 15 April 2021
Today, investors are constantly looking for means to improve their investment returns and make more money. The investment world is a very finicky one, and it’s pretty easy to fall into several of the traps that have laid themselves out for you.
When navigating the investment world, it’s critical to understand some essential things. For instance, you need to know the right stocks to pick and the right time to pick them. There are different companies and types of investments, and the perfect timing will make all the difference when it comes to your returns.
While there is generally no one-size-fits-all solution to stock performance optimization, you can take some critical advice on the way to get started.
1. Equities Beat Bonds In The Long Term
In truth, equities tend to carry a higher risk than government bonds. However, they are also high-return assets that can fetch you some money. Most expert stockbrokers like Peru Consulting will recommend that you get a healthy mix of both in your portfolio as you move forward.
Take the United States, for example. Between 1926 and 2010, the country’s S&P 500 Index, which tracks its top 500 large-cap stocks, provided an average yearly return of 10 percent. Within the same period, long-term government bonds in the country gave an average of 5.5 percent annual returns. Government bonds are much safer, but they might not be the ideal choice to stuff your portfolio with if you would like to optimize your returns.
2. Diversification Is Key
This is a tip as old as the investment industry itself. When investing, you should never put all your eggs in one basket.
In truth, everyone understands what diversification is. The only problem is that most people tend to stray from this when one asset class is experiencing a bull market. After all, increasing your stake in that asset class will help you to accumulate more gains in less time.
Sadly, bull markets never last. You could very well lose a month’s worth of gains in a couple of days and be back to square one because you were overexposed. Minimizing the effects of unwanted yet inevitable circumstances is what diversification helps with.
No matter how well you’re crushing the stock market, always remember to keep some money in fixed-income and cash investments. They will cushion the losses you experience when the stock market has a downturn, and you will be all the better for it.
3. Don’t Let The Market Move You
As an investor, you need to keep in mind that diversification alone won’t save you. As explained earlier, the market can be very finicky, and returns can drop dramatically over a short period. The most legendary investors understand that short-term returns aren’t the main prize. They might look attractive sometimes – for instance, when a company delivers over 500 percent returns in a year. However, it would help if you always looked towards the long game.
You could be looking at bull and bear markets with hesitation over whether to continue topping your portfolio up.
- During the bull markets, you could believe that your returns are strong enough and you don’t need to keep investing
- During bear markets, you could decide not to reinvest since the returns keep reducing
In truth, both assumptions won’t do you any good. Topping your portfolio during a bill market helps it grow faster and will offer you additional capital for more investments. As for the bear market, topping your portfolio up minimizes your losses and allows you to buy the dip. When the market corrects and consolidates, you will see even more substantial gains.
4. Choosing What Companies To Invest In
Ever since index trading became available to investors, there has been a noticeable improvement in value companies’ performance in the global market. So, portfolios that have tilted more towards value companies have performed better historically.
Most times, growth stocks have high stock prices when compared to their accounting metrics. Many consider them to be quick-growing companies that don’t have much concern for dividends and investor payouts. On the other hand, value companies have lower stock prices and are prime for long-term growth.
Value companies can offer annual dividend payouts, which could grow your gross returns. This is especially helpful if you notice that the company’s stock has a low appreciation annually. Again, if you’re thinking long-term, value companies are an ideal buy.
5. Make Your Investments Tax-Efficient
When building your portfolio, you also need to consider the impact of capital gains tax and other tax exemptions. While you can’t make these taxes go away entirely (except if you use a tax-sheltered plan), you can minimize the investment taxes to a considerable degree.
For instance, you could avoid the incidence of heavy trading, which increases your capital gains – and, by extension, your capital gains taxes. Combined with the trading fees, these taxes essentially depreciate your portfolio’s performance and cost you more in the long run.
Another strategy is to focus on index-based exchange-traded funds (ETFs). These funds are tied to underlying assets, so they only trade when the underlying indexes trade. With less trading activity, your capital gains are minimized – and so are your taxes.
6. Remember To Rebalance
Rebalancing is basically about returning your portfolio to its initial diversification level. If you planned to invest equally in stocks and bonds but made alterations as time went on, rebalancing is essentially the act of making things as they should have been in the first place.
Over time, you will find that your portfolio will change due to market conditions. So, a 50/50 split between stocks and bonds could become a 70/30 split which tilts more towards stocks because the stock market has risen so well.
This act is especially true when there is a bear market, and you notice that one asset class is flailing. By rebalancing, you could increase your stake in that asset class and set yourself up for gains when the market consolidates.
You can generally rebalance using three methods:
- Increase your holdings in the under0-weighted asset class (in this example, bonds)
- Sell a piece of your over-weighted class (stocks) and use the funds to add to the under-weighted class
Withdraw funds from the over-weighted class