Changing a current investment strategy can increase the returns on a portfolio whether it's for short-term gains in a brokerage account or long-term gains for retirement. Strengthening returns in investments can be made by targeting investments in a strategic sector, choosing all equities, implementing dollar-cost averaging and passive investing, among a few strategies. "In the long run, boosting portfolio returns has less to do with investment choices and more to do with managing investor behavior to create favorable conditions for success," says J. Cannon Carr Jr., chief investment officer at CornerCap Investment Counsel, an Atlanta-based investment firm. Here are seven strategies to consider.
One way investors can increase their returns is to be overweight in a sector that looks attractive, says Ron McCoy, president and CEO of Florida-based Freedom Capital Advisors. His firm has been adding plays on the rollout of 5G mobile communications to portfolios that include names like Nokia (NOK) and Telefon Ericsson (ERIC). There are many companies that will participate in the rollout of 5G and one sector exchange-traded fund that recently launched is the Defiance Next Gen Connectivity ETF (FIVG). "By playing an ETF like FIVG, you can avoid single-stock risk and participate in what appears to be a big change in technology in the next few years," he says.
Gold is an asset used by investors as a hedge or a safe-haven asset similar to U.S. Treasurys because it retains value when riskier assets fall. Gold prices are typically driven by the direction of the U.S. dollar and concerns about an economic slowdown. This precious metal can also be used to add diversification, says Christopher Irons, founder of Quoth the Raven Research, a Philadelphia-based financial research company. "I'd rather be in commodities instead of U.S. stocks or bonds. I don't trust that the Fed knows what they're doing in the slightest." Irons prefers to own physical gold than mining stocks and exchange-traded funds and has a double-digit percentage weighting of his capital in gold.
Investing only in the stock market is viewed by experts as being risker, but this move can create more long-term wealth. Historical data show stocks have outperformed bonds, REITs and cash over long periods of time. While allocating an entire portfolio to stocks may increase returns, it exposes an investor to risk, volatility and periods of lower returns. Investors should check to ensure there is diversification and the fees are the lowest possible in a sector. "To reap the benefit of an all equity strategy, you must be invested for the long term and be willing to stomach the volatility associated with stocks," says Evan Kulak, co-founder of Polaris Portfolios.
Stocks with dividends
Dividend reinvestment plans and "dividend aristocrats" funds are two ways to invest in stocks that generate dividends. Dividend reinvestment plans allow investors to reinvest the dividends instead of letting these payouts accumulate in cash or in a money market account, McCoy says. These plans are a good strategy for younger investors and provide an opportunity for cheap dollar-cost averaging, he says. The Proshares S&P 500 Dividend Aristrocrats (NOBL) is rebalanced annually and reinvests dividends. Two other options include the SPDR S&P Dividend ETF (SDY), which tracks and matches the returns of the S&P High Yield Dividend Aristocrats Index, and the Cboe Vest S&P 500 Dividend Aristocrats Target Income Fund (KNGIX).
Dollar-cost averaging is buying the same dollar amount of a stock, mutual fund or ETF on a predetermined regular basis. For example, an investor can purchase $500 of a certain fund every month to a portfolio. Over a one-year period this would result in 12 separate purchases. The average price could be determined by simply dividing the total money invested – $6,000 – by the number of shares of the fund purchased. "(This method) is a mechanical approach to investing and removes the emotional aspect to investing. Overcoming emotion is the key to successful long-term investing," says C.J. Brott, founder of Dallas-based Capital Ideas.
Small bond amounts
While stocks outperform bonds over longer periods of time, a small exposure to bonds such as 10 percent will provide a hedge against volatility, Brott says. The Federal Reserve's recent dovishness means the economy is facing slow growth with little or no inflation and gradually rising wages. "This leaves most companies able to maintain adequate profit margins as rising wages will be offset by slowly rising prices," he says. "General Mills (GIS) is a good recent example." The bond market is facing an environment, in which short-term rates have little room left to fall and will provide "little in the way of total return for the balance of the year," he adds.
The returns from passive investments in an index fund, or ETF, can outperform assets underactive management. Benchmarks like the S&P 500 (.SPX), S&P MidCap 400 (.MGD) and the S&P SmallCap 600 (.CVK) serve as the basis for passive investments. Over time it has been proven that it is very difficult for active managers to consistently outperform our benchmarks," says Aye Soe, managing director and head of global research and design at S&P Dow Jones Indices. An S&P March report shows that about 68 percent of domestic equity funds underperformed the S&P Composite 1500 (.SPSUPX) in 2018. "In the most recent three-year period, over 80 percent of active managers have underperformed the benchmark," she says.
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