6 Ways to Help Get More from your Investment Portfolio
By: John Esposito AIF®
Over the past four years I have been developing custom portfolios for clients, utilizing a mix of what I think are the best and most highly rated mutual funds and ETFs available. Over time, funds get replaced when rankings and performance lack, asset class weight’s get changed based on market conditions, and sometimes even asset classes will get looked over or passed on depending on timing and the economic environment.
I utilize 6 key strategies to help clients get the most from their investment portfolio.
- Position Size
What do I mean by position size? In our models, we base the number of investments we use on the value of the portfolio. For example, on a $30k portfolio we most likely would use one fund and on a $100k portfolio we would use 3-5 mutual funds based on the objective. What I am getting at is that there needs to be some substance in each investment to reap the benefits of the strategy.
We have all heard this one before from our parents and grandparents. “Don’t put all your eggs in one basket”. From an investment perspective, this is called Modern Portfolio Theory. Modern Portfolio Theory or MPT is a way of diversifying and allocating assets in an investment portfolio with the goal of maximizing the portfolios expected return based on the investor’s suitability.
- Consider Investing in Growth Sectors as part of your overall portfolio
This has been a huge debate and more recently brought to light, “Growth vs Value.” *Over the past 10 years growth stocks have led the way in terms of performance on the upside and downside as well. However, in the wake of Covid-19, Value is beginning to show its true colors on the rebound. If there is a time to equal weight or overweight value to growth, it may be now.
- Dollar Cost Averaging
Dollar Cost Averaging is an investment strategy in which an investor systematically buys or divides a total amount to be invested across periodic purchases in an effort to reduce the impact of volatility on the overall purchase. An example of this is setting up a contribution plan to a new IRA. Instead of making a one-time contribution of $6k, you can split it up into 12 monthly contributions of $500. By doing this, you reduce the risk of having a major market downturn the day after your investment settles. By contributing smaller amounts at the same time every month, you are effectively buying the investment for the best price on average.
- Portfolio Cost
Cost is something that comes to mind in all aspects of the financial planning world. I like to look at the overall cost of the portfolio and if the performance is worth the expense compared to, let’s say the “index”. Sometimes investors get a little carried away using more than one or two managers for an asset class. Sometimes this happens with larger portfolios and it often happens when an investor has multiple portfolios with different advisors and institutions. A term we like to use to measure this is “tracking error” – it is when you have essentially created an expensive ETF by using multiple strategies in the same asset class.
- Seek to beat the Benchmark
Finally, on to number 6. Performance over the Benchmark! How does a portfolio show its value? Even better, how does a wealth manager show his or her value?
Benchmarks include indexes that measure various investments and sections of the markets and are used to evaluate portfolio performance., Passively managed funds, such as index funds or exchange-traded funds, invest in the same securities that make up a particular market index in an attempt to match the performance of that index. Because there is less work involved with managing passive funds, they tend to have lower fees than actively managed funds. Actively managed investment funds are chosen in an attempt to do better than the market. The goal of an actively managed fund is to perform better than the specific market index with which the fund is being compared. Once you start adding different asset classes and strategies into your portfolio, you can sometimes begin to diminish your performance and it may even have a negative effect from a performance and cost standpoint.
Take these six strategies into consideration or be sure your advisor is taking them into account in your reviews. If you would like to hear more about our strategies, feel free to call our office anytime or visit our website DiMatteoFinancial.com. Be sure to follow us on Facebook, Twitter and LinkedIn.
- Federal Reserve Bank of St. Louis: Wilshire US Large-Cap Growth Total Market Index
- Federal Reserve Bank of St. Louis: Wilshire US Large-Cap Value Total Market Index
Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products services offered through CES Insurance Agency. Tax planning services offered through DiMatteo Group are separate and unrelated to Commonwealth. The receipt of this email will not secure insurance coverage. If you require any coverage or need assistance, please contact the Shelton office at 203-924-4811.
Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or gal will be achieved. Systematic investment plans do not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. Past performance is no guarantee of future results. Talk to your financial advisor before making any investing decisions. An actively managed investment fund is a fund in which a manager or management team makes decisions about how to invest the fund’s money. Such decisions are made in an attempt to do better than the market and involve actively choosing which investments to purchase, hold, and sell for the fund. The fund manager performs an analysis using in-depth techniques and methods that may involve numerous investment options. The goal of an actively managed fund is to perform better than the specific market index with which the fund is being compared. Passively managed funds, such as index funds or exchange-traded funds, typically invest in the same securities that make up a particular market index in an attempt to match the performance of that index. Because there is less work involved with managing passive funds, they tend to have lower fees than actively managed funds. A passively managed fund does not have a management team making decisions. Instead, the fund manager creates a fund portfolio that includes most, and if not all, of the associated index’s holdings with the goal of trying to achieve the same returns as the index. Instead of making numerous and frequent trades, which occurs with active management, passively managed funds typically hold onto their underlying securities for the long run. Long-term growth and portfolio diversity, which can help minimize risk, are key advantages of passively managed funds. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses.
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