There are important things to remember when it comes to improving
your portfolio’s performance. Here are some of them. Read on!
Setting Asset Allocation
The percentage that you put into different asset classes
such as bonds or stocks should be allocated according to your risk tolerance,
financial stability, time frame, and length of time you’re willing to wait to
see the returns.
Finding a way to allocate assets to achieve individual investment
goals is one of the most important factors in increasing portfolio performance.
You should determine your long-term financial goals, put in place a specific
investment plan, find the risk level you are comfortable with and consider the
required level of diversification to provide protection during unexpected
downturns in the market.
Regular Portfolio Rebalancing
Once you allocate assets in a way that suits your investment
goals and strategy, it is important to continue tweaking an investment
portfolio based on the changing market conditions and any changes in investment
goals.
As investments vary in performance, they also generate
different returns over a period of time. Thus, the portfolio may have a tendency
to slide away from your target allocation.
Therefore, the risk and return trade-off characteristics of
the portfolio may eventually become unbalanced. It will not he necessarily
suited for your needs and goals.
Rebalancing your allocation to push the portfolio back on
track is very, very important. The goal behind this step is not so much to maximize
returns but instead to maintain the desired level of risks.
Managing Costs
You should also continually monitor the costs you spend on
your portfolios. This includes taxes, trading fees, and management expenses.
Expenditures to pay an adviser’s fee are also falling under
the costs that chip away from your potential returns. The expense ratio of fund
investments can be a crucial factor in finding your overall level of
profitability.
One good alternative to keep the costs down is to consider
low-cost, exchange-traded funds, or even index funds. Both types of investment
funds track market indexes and are a good alternative when you want to keep
your expense at a minimum.
Managing Taxes
Taxes can be one of the biggest subtractions from your profits,
and thus they must be carefully managed.
Tax management for a portfolio is seen under three categories:
·
Tax-loss harvesting
·
Asset allocation
·
Withdrawal strategy in retirement
Tax-loss harvesting has something to do with managing investments
to generate more possible tax savings. Investors can take advantage of investments
slumping in value by selling at a loss, which may generate a tax deduction,
obviously lowering your taxes. The tax loss can also be used to offset future
gains.
Part of good fundamental asset allocation is putting the
most tax-efficient investments in taxable accounts and the least tax-efficient
investments in tax-deferred or non-taxable accounts.
Withdrawal order applies to retirees. Commonly investors
fund different types of accounts over their lifetime. Each type of account sports
different tax consequences when withdrawing assets. A thoroughly-planned strategy
can help save retirees a great amount of money.
Maintaining Discipline
Having all these (carefully-planned investment strategy,
proper asset allocation, tax management, rebalancing, and cost management) will
only be useful if you have the discipline needed to make these things work on
your favor. You should have the discipline to stick with your chosen trading
plan.
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