The purpose of an investment portfolio is to provide a leg-up to the process of wealth accumulation. The expectation of a higher reward than traditional means is what motivates an investor to assume a higher risk.
However, there can be a situation in which the risk-return trade-off might not be rewarding enough. In order to ensure the best out of an investment portfolio, there are 10 aspect an investor can look at which can boost performance.
Broaden your horizon but within familiar territory: Creating an investment portfolio means adding securities spread across asset classes (equities, bonds, commodities) and investment vehicles like mutual funds to it. But as an investor you need to be cognizant of and comfortable with what goes into the portfolio. For instance, if individual stocks are in the portfolio, you should be aware of the companies and their history. Any other stock should only form part of the portfolio after due diligence else it may cost in terms of lower returns.
Asset Allocation: Allocating assets across asset classes is key to improving portfolio performance. A mistake many investors commit is not including securities across asset classes which concentrates their portfolio and increases their risk. Including stocks, bonds, non-convertible debentures, bullion, commodities and funds can get one the best of what financial markets have to offer.
Diversification: A related point to asset allocation is diversification. It not only means diversifying investment across asset classes but also within asset classes. For example, while investing in mutual funds, it is necessary to spread the money across funds with different investment strategies and market capitalizations. There is a high possibility ending up holding similar stocks across funds, thus defeating the purpose of diversification.
Due exposure to equities:An exposure to equities is essential, unless the investor is about to retire or lose a consistent flow of income. The size of the exposure could vary according to risk tolerance and life stage, but given equities’ outperformance over the long-term, this is a must-have asset class. Taking the direct equity route or mutual funds for doing so is advisable.
Have some exposure to mid and small-caps: In a related point to the above, some exposure to mid and small caps can provide an edge to an investment portfolio. These companies have the potential to outperform large cap stocks and though they are much riskier, inclusion of good quality companies is indispensable to an investment portfolio.
Reinvest dividends: For young investors with a steady stream of income, dividend reinvestment is crucial to boost portfolio returns. Unless the dividend income is needed due to life stage requirements, it should be reinvested in stocks, bonds and funds. Given that it was not part of the original principal, this additional money will help one increase the investment base and grow it quicker.
Saving tax should not be the sole aim: Some investors turn to financial market securities solely for the purpose of saving on tax. Though tax saving instruments like ISA (Individual Savings Accounts), premium bonds and NS&I (National Savings and Investments)can be a good way to create a portfolio, it should not be the sole aim as it restricts the investment universe substantially. Non-tax saving instruments can sometimes far outperform tax saving ones and not investing in them can be costlier than paying tax on capital gains availed from them.
Keep low portfolio turnover: Changing the components of an investment portfolio is costly trading fees is pad out on every buy and sell decision. This frequent portfolio churn eats into portfolio returns over a period of time and can significantly lower them. Thus, buy and hold is a strategy which can serve investors well.
Portfolio rebalancing:A well-defined period – quarterly, six-monthly, or yearly – can be decided to rebalance the portfolio. Given market conditions, upcoming expenses, or change in investment objective, rebalancing an investment portfolio to reflect the change is crucial to an optimal performance.
Resist the urge to constantly check performance: Keeping a tab on portfolio performance is essential, but too frequent checks can nervous-pangsin an investor and force them to indulge in buying and selling securities when it may not be essential to do so. This not only increases turnover cost, it may also lead to a short-sighted portfolio and reduce returns.
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