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. Personally, I relied less on picking the winning investments, and embrace investing strategies that are proven to enhance investment performance and build wealth over time. It is essential to remember that investing is not a get rich quick scheme. It is a disciplined and methodical way to grow your wealth over a long time.
5 Ways to Boost Your Investment Performance
The following are the investing strategies and tactics that had helped me build wealth and boost my investment portfolio performance over the years:
1. Automatic Contribution
In my opinion, the best way to build wealth is to save money and add new funds to your investment portfolio regularly.
My two most important financial transactions — i.e., paying for the mortgage and saving for retirement — are fully automated. My paychecks are deposited directly into my account, bills are paid automatically, and the remaining amount goes toward savings and investing.
By automatically investing your money regularly, you’re leveraging a mechanism called Dollar Cost Averaging, that buys more shares when they are cheaper and less when they are more expensive.
2. Automatic Reinvestment
The second strategy relies on the power of compound interest. I instructed my broker to reinvest my stock dividend payments and fund distributions to buy more shares with each payment. By adding dividend payments and distributions back into my portfolio, I now own more shares of investments that paid me those distributions and dividends in the first place. Assuming the payment per share stays about the same or increase, I am setting myself up for larger payouts in the future.
In the illustration below, you can see how the number of shares grows each time a distribution or dividend payment is reinvested.
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 buy 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 expenses. You can choose a brokerage firm that charges lower trade commissions (it is much easier now that everyone is racing toward $0) and investments that charge lower expense ratios.
Here are some ideas to help you improve your investment performance with regard to lowering the expenses.
- 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 a lower expense ratio.
- Choose ETFs over mutual funds.
Based on my calculation, a reduction of 0.5% on annual expenses over 30 years could increase your overall performance by as much as 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 and tax-free accounts when appropriate. For example, traditional IRA, Roth IRA, traditional 401(k), and Roth 401(k) are good options for retirement savings.
- Place high dividend yield and fixed-income investments in a 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 one year and one day before taking profit to take advantage of long-term capital gains
- Avoid wash sale trap
Bonus Tip: 401(k) Company Match
Contributing money to your 401(k) 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.
Read More: What is a 401(k) Plan and How Does It Work
Do you have another surefire way to improve investment performance? Please share it with us.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.