Investing, whether in the stock market, real estate, cryptocurrency, or any other asset, is all about making your money grow. So, it only makes sense that the investing community is constantly looking for ways to increase their investment returns.
Whether you’re a beginner or an expert, there’s likely one or two ways — if not 10! — you can push your portfolio to perform better in the market. And many options for accomplishing this are surprisingly easy to deploy.
How to Increase Your Portfolio’s Values
Making your investment portfolio work harder for you involves taking active steps to either change your investing style, increase the amount of time your investments have to work for you, focus on consistent contributions, or a mix of the three. Here are some of the easiest ways to increase your portfolio’s returns, often significantly.
1. Start Investing Early
The first thing you should think about when it comes to investing is the power of compounding returns. As your investments grow, they work harder for you, but the growth takes time to accomplish.
The best way to give your investments adequate time to work for you is to start investing as early as humanly possible. If you haven’t already, start now! If you’re a parent, give your children a head start by investing a portion of their allowance and other earnings in a custodial investment account.
One common misconception about investing early is that you need to know everything there is to know about the market to get started.
The truth is that anyone can immediately tap into the power of compounding gains in the market with investments like mutual funds, exchange-traded funds (ETFs), and index funds designed to track a market index or other benchmark. These funds take the hard work out of your hands and put the responsibility on Wall Street’s professional fund managers.
Even if you know nothing about the market, using a robo-advisor like Betterment or Acorns will allow you to tap into gains early while you learn to manage your own investments, making your long-term financial goals more achievable.
The bottom line is that every day you wait costs you big in the long term. So, get started now!
2. Automate Your Investments
Many beginners start their investment journey with a lump sum, such as a tax refund, and fail to make regular contributions after that. While some start with the best intentions, the human mind is often forgetful. Failing to make consistent, regular contributions to your investment portfolio limits your growth potential.
Automate your investments to take this headache out of the portfolio management process.
Most online brokers give their users the ability to make automatic regular contributions to their investment portfolio on a weekly, monthly, quarterly, or annual basis. By taking advantage of this option, regular contributions become a habit, helping you stay on track to reach your goals and giving your portfolio the ammunition it needs in the battle of the bears and bulls.
You’ve heard the expression, “don’t put all your eggs in one basket.” Nowhere is that more true than in the stock market.
It’s impossible to predict when a single company may produce poor earnings, have an accounting error, or experience some other type of negative surprise. If all your money is invested in one company, that negative surprise has the potential to devastate your portfolio. In a diversified portfolio, however, gains from other assets can offset such losses.
Diversifying your investments is a simple process. Consider the 5% rule — it’s an easy asset allocation strategy that suggests you should never invest more than 5% of your portfolio in a single asset (or in a group of high-risk assets). Following this rule means that even if a stock in your portfolio were to fall to zero, and every other stock remained flat, the biggest loss you’ll take is 5%, which is relatively easy to recover from.
When practicing diversification, also consider diversification in asset classes. Stocks, bonds, commodities, and real estate all have the potential to generate gains, even when other classes of assets are falling. For example, when stocks and real estate take a downturn, bonds and commodities tend to rise, offsetting potential losses.
Regular rebalancing is a must in investment management. A well-balanced portfolio provides exposure to gains while limiting exposure to losses. Over time, you’ll find that different assets in your portfolio move at different rates, which will lead to an imbalance that could leave you overexposed to risk if left unchecked.
When it comes to growth and other aggressive portfolios, investors should rebalance on at least a monthly basis to ensure their exposure to risk remains minimal. With more passive strategies like income investing and indexing, rebalance your portfolio quarterly to ensure that everything stays in line.
5. Think Long Term
When choosing an investment strategy, the time horizon you focus on will make a significant difference in the likelihood of your success. Short-term investments are far riskier than long-term investments because when you invest, you’re taking a shot at predicting the future.
Predictions with a longer time to come to fruition have a higher likelihood of being right.
Step away from the stock market for a moment. If you were to predict that a tropical storm or hurricane would touch down in Florida in the second week of June, you’d have a much lower probability of being correct than you would if you predicted a tropical storm or hurricane would hit Florida in the next year. On average, Florida experiences a tropical storm event at least once per year.
The same concept applies to the stock market.
There’s no way to accurately predict what will happen to stock prices in the short term. But with a bit of market research, it is possible to make relatively accurate assumptions about the long-term prospects of publicly traded companies.
Focusing your investments on the long term will give you a higher win rate and, for most investors, lead to far more impressive long-term returns.
6. Don’t Give in to Emotion
When you watch individual stocks in your portfolio rise, it may be difficult to resist the temptation to buy more. When they’re falling, you’ll want to sell. In the vast majority of cases, giving in to these emotions proves to be a mistake.
Avoid making moves in the market based on your emotions and stick to an investment strategy focused on sound research and the use of risk management tactics.
7. Minimize Investment Fees
You’re in the market to make money, not spend it. But all too often, fees associated with investing cut deeply into returns investors could be pocketing.
Every brokerage is its own business, meaning that they have the right to dictate how much money they charge for their services. The same goes for investment-grade funds, robo-advisors, and any other investing service available.
Fees often vary wildly from one company to the next, so pay close attention to them.
The most common fees you’ll come across include:
- Trade Commissions. Although there are plenty of discount brokers that offer commission-free trades, there are also many traditional brokers that charge commissions every time you buy or sell a stock. With options to avoid paying these fees, there’s no reason to sign up to give a broker unnecessary money. Only work with brokers that offer commission-free trading.
- Contract Fees. If you’re trading options or futures, you’ll pay contract fees. Before signing up with a broker, compare the contract fees charged and make sure you’re getting the best deal.
- Fund Expense Ratios. Expense ratios are the expenses charged on mutual funds, index funds, and other investment-grade funds. Pay close attention to the fees each fund charges because these costs cut into your earnings.
- Advisory Fees. If you’re working with a financial advisor, investment advisor, or robo-advisor, you’re going to pay advisory fees. Depending on the type of advisor you’re using, the fees can vary wildly, so make sure you know what you’re paying before taking advantage of the services.
8. Minimize Investment Taxes
If you’re making or spending money, the government wants its cut. That’s true whether you earn money at a 9-to-5 job or in the stock market.
- Hold Your Investments for at Least One Year. Long-term capital gains are taxed at a lower rate than short-term capital gains, which are taxed at your regular income tax rate. By holding your investments for at least one year, you’ll greatly reduce your overall tax burden.
- Practice Tax-Loss Harvesting. At the end of each year, look at your portfolio and identify the investments that have lost money. If you sell some of these positions and accept the losses (realized losses), you can claim capital losses that offset the gains you’ve earned in other investments, reducing your tax burden. This common strategy is called tax-loss harvesting.
- Invest In Index Funds. Beginners should consider investments in index funds for several reasons, tax efficiency being one. These funds are known for triggering few taxable events, holding onto investments for a year or longer, and offering other tax loopholes.
9. Use Dollar-Cost Averaging
The stock market is known for peaks and valleys, and it’s impossible to predict where those highs and lows will be. Dollar-cost averaging is the process of spreading large investments out over time. The idea is to make equal investments at predetermined time intervals in order to make sure you don’t buy all your holdings at high prices right before a crash.
With a dollar-cost averaging investment plan, some shares are often purchased on highs, some on lows, and most in the middle. At the end of the entire purchase, your average cost isn’t likely to be the lowest possible, but it’ll likely be far from the highest possible price as well.
10. Buy Growth Stocks
Growth investing is a style of investing that really picked up steam in the post-COVID-19 market recovery. Growth investors look for stocks that have a strong history of producing compelling growth in revenue, earnings, and share prices.
By investing in these companies, you’re betting that the upward trend will continue, and in many cases, that’s exactly what happens.
These companies tend to be the most innovative in the technology industry, but gems can be found in just about any sector. Nonetheless, making the right moves as a growth investor has the potential to send your portfolio to higher highs.
11. Buy Small-Cap Stocks
The term small-cap often leaves a bad taste in the mouths of investors. Beginners are regularly told that small-cap companies are just getting their feet wet and come with significantly higher risk, and it’s impossible to deny that fact.
However, in the stock market, risk is generally met with reward.
Historically, small-cap stocks have produced higher returns than their large-cap counterparts over the long run. Although investing in these smaller companies will require a deeper understanding of their businesses — meaning more research is required — the potential difference investing in small-cap companies can make in an investment portfolio is often shocking.
12. Buy Value Stocks
Most people think that the strength of a company and its future prospects are what move the value of its stock. That’s not the case. The primary driver of movement in the stock market is you, the investor.
Regardless of how well or how poorly a company is doing, when more people buy than sell, stock prices increase. When more people sell than buy, stock prices fall.
There are several publicly traded companies that haven’t caught the attention of the masses recently and are trading at much lower prices than their fundamental data says they should be. By purchasing these stocks, you’ll get to share in the recovery once the market catches onto the discount, resulting in gains that outpace other portfolios.
Taking advantage of this strategy is known as value investing.
If you’re looking at your portfolio wondering what you can do to earn more in the market, it’s time to take action. If you’re not already using the strategies above, take advantage of them in your portfolio to expand your earnings.
However, as is always the case when attempting to deploy new strategies or concepts, it’s best to test your ability to execute those strategies using a market simulator. Never risk your hard-earned money until you know that what you’re doing works.