How to Improve Portfolio Returns and Lower Risk
It’s all about higher returns for investors today. Because who wants to enter into the investment game thinking they are about to lose a lot of money? And no one wants to invest when their strategy is simply to break even. But higher returns and lower risk is not the easiest combination to master.
How do you become a more savvy investor? Are there any key tips you need to know? For example, should you opt for a passive portfolio management strategy or an active one? Large or small entities? Equities or bonds?
Here are some tips to help you become a better investor with a more confident control of your portfolio. Check out the insights that could help you avoid making costly mistakes now and in the future.
The Power of Diversification
Diversification and tactical asset allocation is the method of combining different asset classes to form a diversified portfolio. The right mix of entities can reduce the overall risk of your investments and can improve returns, particularly over the long term.
Investors can also benefit from a combination of strategies including Dual Momentum and mean-reversion. Combined, these tactics reduce volatility and maximize returns.
Equities or Bonds? Small or Large?
It’s true that equities are a higher risk strategy compared to bonds but this should never preclude their inclusion in a portfolio. In fact, a balanced portfolio with the two entities combined should provide a healthy return over time with a minimum of volatility.
And should you pick small or large companies to invest in? Smaller companies have an inherently higher risk attached than larger companies, since they are – naturally – less established and they are still finding their feet in the market. They are less likely to receive loans or funding from the major banks. They also have a limited track record. But it is not enough to invest in larger companies at the full expense of smaller ones. Studies show that smaller companies tend to outperform over time. A portfolio that includes a combination can sway your returns to the higher realms.
Is Limiting Your Costs a Good Idea?
Minimizing your expenses should be a prime consideration when it comes to investing, no matter your portfolio type. How you invest will impact how much you spend on your investments. You can choose an active or a passive investment strategy. The active strategy is typically higher in costs than the passive since there must be more expert input.
However, although passive management minimizes costs, it may not be the most appropriate method for investors. The traditional investment model of buy-and-hold often underperforms – and it doesn’t offer much in the way of excitement, which is an important factor to consider.
Rebalancing For Higher Returns
A portfolio will, over time, naturally fall away from its original lines and will move outside the asset class percentages. Adjusting your portfolio so that it maintains its original balance is necessary to help minimize risk and keep a portfolio healthy.
Rebalancing may add an extra input of cash into the part of the portfolio that is under weighted. It could involve selling some of the over-weighted portion, or it could include taking withdrawals out of the asset class that is the most over weighted. It is an effective method to help return a portfolio to the ideal risk tolerance level.
Investing may seem overly complicated in today’s market. But by looking again at the simplest and most reliable tools for investment portfolios, you can reap rewards that you may otherwise have overlooked. Tools such as effective asset allocation and intelligent rebalancing boost expected returns. And a wise approach to choosing the right assets for your risk tolerance will also help improve the success of your balanced portfolio.