5 Surefire Ways To Improve Your Investment Performance

By Pinyo, on September 12, 2008

Investing in the stock market is a risky business if you don’t know what you’re doing.  Even if you do, it’s possible to lose a lot of money — e.g., Bear Stearns, Fannie Mae, Freddie Mac, etc.  Personally, I have moved away from individual stock picking for many years now, and embrace investing mechanics that are proven to enhance investment performance and wealth over time.

Photo by Wonderwebby via Flickr

Five Ways To Boost Your Investment Performance

The following are the investing mechanics and tricks that had helped me build wealth and boost my portfolio performance over the years:

1. Automatic Contribution

In my opinion, the best way to build wealth is save money before you spend it.  My two most important financial transactions — i.e., paying for mortgage and saving for retirement — are fully automated.  My paychecks get deducted, my money goes where it’s supposed to, and the remaining amount going to my brokerage account.

By automatically investing your money on a regular basis (as I do with my 401k), you’re leveraging a mechanic that buy more shares when they are cheaper and less when they are more expensive.

Note that regular contribution is similar, but not the same as dollar cost averaging.

2. Automatic Reinvestment

The second mechanic relies on the wonder of compound interest.  I instructed my broker to reinvest my fund distributions and stock dividend payments to buy more shares of the investment.  By adding dividend payments and distributions back into my portfolio, I am setting myself up for potentially larger payout in the future.

Note that if we are dealing a basic savings account with fixed interest rate, reinvesting your interest guarantees higher future interest payment.

3. Asset Allocation

Do you wish you can buy low and sell high on a regular basis? You can, if you use asset allocation and rebalance your portfolio strategically.  Asset allocation takes advantage of your assets’ different rates of return, as well as the differences in performance cycles, to create buy low, sell high opportunities.

By rebalancing your portfolio to restore the original percentages, you are selling some shares of the good performers (sell high) to by some shares of the bad performers (buy low).  Since it’s not possible to predict the next winner, you’re putting yourself in a better position to capture more gain.

4. Lower Your Expenses

Frugality works everywhere, including investing.  One of the few predictable factors with regard to investing is your investment expense.  You can choose a brokerage firm that charges lower trade commissions (i.e., Zecco and eTrade), and investments that charge lower expenses (this is expressed as expense ratios for mutual funds and ETFs). As such, this is a great way to improve your investment performance.

• Limit the number of trades.
• Choose no load, no transaction fee mutual funds over ones with load and transaction fee.
• Choose passively managed funds over actively managed ones.
• Choose mutual funds and ETFs with lower expense ratio.
• Choose an ETF over mutual fund, if the lower expense ratio outweighed the trade commissions.

Based on my previous analysis on the impact of expenses on investment performance, a saving of O.5% on annual expenses over 30 years could increase your overall performance by 14%.

5. Tax Optimization

Investing with tax efficiency in mind is another great way to improve performance.  Here are several things that you could do:

• Use tax deferred or tax free account when appropriate.  For example, traditional IRA, Roth IRA, traditional 401k, and Roth 401k are good options for retirement savings.
• Place high dividend yield and fixed-income investments in tax-sheltered account.
• For your taxable account:
  • Minimize transactions that result in tax liability — i.e., capital gain distributions and profit taking.
  • Sell some of your poor performers to take advantage of tax loss harvesting (up to $3,000 per year).
  • Wait at least 1 year and 1 day before taking profit to take advantage of long-term capital gains
  • Avoid wash sale trap

Bonus Tip: 401k Company Match

Contributing money to your 401k to get your company match is probably the only free money you’ll get in the world of investing.  If you are not doing it, you are leaving money on the table.

Do you have other surefire way to improve investment performance? Please share with us.

This article was featured in the Festival of Stocks #106 at Qovax.

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Pinyo is the brain behind Moolanomy personal finance blog and a few other web sites. If you like this article, please subscribe for free daily email updates.

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