As many private employers slowly reign in the cushy retirement benefits your parents might have seen (and retired on) back in the day, individual investors are becoming more involved in the planning and maintenance of their portfolio assets. Employer contributions are going the way of the dodo, making individual investment decisions more important than ever. Luckily, economists generally agree there are five ways to boost portfolio growth and give you more bang for your buck.
Use ETFs to Diversify
A handful of exchange-traded funds (ETFs) across vast sections of the market could make your portfolio resemble an overall benchmark index for the entire market. This investment decision doesn’t necessarily guarantee increased growth simply by growing faster, but acts as a diversified buffer that will most likely safeguard you from sharp declines by individual companies or commodities. In other words, ETFs can indirectly help your portfolio grow by lowering the volatility of your investments.
Remember, ETFs work best over the long haul, since growth will be more stabilized and slower-moving. Besides, you might as well just go with a straight market index. If the entire economy tanks at a rate of about 30 percent, there’s not much you would’ve been able to do had you done it alone.
Think Small for Big Gains
Established companies with large capitalization tend to move up or down the ticker at a slower pace than small cap companies. Small cap stocks work with a mindset similar to what you’d see with bonds rating below a C — there isn’t as much as a proven track record for success, they have higher risk, and tend to be dwarfed by those large cap companies.
But similar to those low-rated bonds, there’s a chance for big returns. On average, small cap US companies average 2.1 percent higher annualized returns compared to large cap companies since 1926. If you start dabbling in small caps overseas, you could expect to see an average annualized return of 5.8 percent over large caps from those same nations since 1970.
You might have a stellar portfolio full of nothing but blue chip stocks, high returns, and big dividends. But no amount of market success can excuse unreasonably high management expenses. Whether you’re trading by yourself, working with a broker to analyze and study the market, or leaving the decisions up to a mutual fund manager, you’re going to end up paying fees that eat into your earnings. What good are high returns if you lose a significant portion of them to things like commissions and administrative costs?
Keep those expenses down; don’t pay for fees that don’t have the interest of the portfolio at heart. Consult the Forbes profile of Ken Fisher, CEO of Fisher Investments for more details on how to cultivate your investments intelligently.
Think Like a Woman
UC Berkeley professor of banking and finance Terry Odean published a revealing report: women make better trading decisions than men. Single women beat single men by 2.3 percent when making investment decisions, and investment groups earn 4.6 percent more on average when the women call the shots. Women make more than men because they trade far less than men, and they’re patient in terms of adversity. Odean’s findings seemed to indicate men tend to make decisions somewhere between the realms of irrationality and overconfidence. Think like a woman, avoid the chatter, and cut back on impulse decisions.
Do Your Homework
The stock market is like a language. It changes over time, it can be misunderstood, and it has a certain cadence to it. Financial alchemy is a peculiar science, one which requires a good deal of study into its history, jargon, and great leaders. The more you understand fundamental analysis tools, the better you’re going to average year after year. Before you invest in an ETF, mutual fund, or REIT, take time to review its history and prospectus. If you want to know where something is going, find where it’s been before. Investors benefit when they take their time to review trends and past market indicators.
Carefully review your financial situation and long-term goals when making investment decisions.