7 Ways to Improve Your Investment Returns

To create a large investment portfolio, you need to save money regularly, invest consistently, and learn to stay the course for as many years as it takes. There are, however, several strategies that can help you improve your investment gains over time. This post highlights a few of those strategies.

Improve Your Investment Returns with These 7 Strategies

1. Find Lower Cost Ways to Invest

It’s easy to ignore investment expenses during bull markets – especially if you’re making money. However, the impact of those expenses can really add up over time, and not in a good way.

In fact, lowering your expenses by just 1% can make a huge difference in the performance of your investment portfolio over the long-term. Let’s say that you’re earning an average of 10% per year on your portfolio, but paying 2% in investment fees of all types. That will leave you with a net rate of return of 8%. If your portfolio is $100,000, it will grow to $466,097 after 20 years.

If you can cut your annual investment expense in half – to just 1%, your effective net return will rise to 9%. If your portfolio is $100,000, after 20 years it will grow to $560,440. That’s a difference of roughly $94,000, and it is earned simply by cutting your investment expenses by 1%. Investment expenses DO matter!

To find the lowest fees possible, look for an online broker that has either a low- or no annual fee, and lower transaction costs. Favor funds over individual securities (since you won’t trade them as frequently), and choose no-load funds wherever possible.

2. Get Serious About Diversifying Your Portfolio

Most of us know about the importance of diversification. But, just as is the case with investment expenses, the concept can easily get lost during a bull market. After all, if your stock allocation becomes disproportionately large in a rising market, it will actually help your portfolio performance – at least for as long as the bull market lasts.

But that’s the problem – bull markets never last. The August mini-crash should be a wake-up call to anyone who has been ignoring proper diversification over the past few years. Markets fall much more quickly than they rise, which means that advance preparation is completely necessary. And that is what diversification is all about – preparing for changing circumstances.

No matter how well your stock allocation is doing, be sure to maintain appropriate percentages of your portfolio in both fixed income investments and cash equivalents. They will help to reduce the losses you’ll experience on your stock allocation in a down market. Remember, minimizing losses during a bear market is just as important as maximizing your gains in a bull market.

3. Rebalance Regularly

Rebalancing is all about returning your portfolio to its original level of diversification. If you originally planned to have 60% of your portfolio invested in stocks, 30% in bonds, and 10% cash, it will be time to rebalance if your stock allocation has grown significantly higher than 60%.

The same is true in a bear market. If your stock allocation has fallen to 40% due to the declining market, you should rebalance to increase that position. It will enable you to take advantage of gains when the market recovers.

4. Take Advantage of Tax-Efficient Investing

Like investment expenses, income taxes on your investment earnings have a substantial impact on the performance of your portfolio. While it’s not usually possible to make them go away completely (unless of course, you are investing in a tax-sheltered plan, like an IRA), it’s very possible and absolutely necessary to minimize investment taxes whenever possible.

One of the best ways to do this is to avoid heavy trading. Trading generates capital gains, and capital gains result in capital gains taxes. Those taxes – along with all of the trading fees involved – can result in a portfolio that doesn’t perform materially better than a buy-and-hold model that’s invested primarily in funds.

And speaking of funds, you should favor index-based exchange-traded funds (ETFs). Since such funds are tied to the underlying index, they only trade stocks when the index changes. That means that they trade stocks far less than actively managed mutual funds. That minimizes your capital gains, which ultimately minimizes capital gains taxes.

5. Tune-Out the “Experts”

Have you ever heard an expert confidently predict that the Dow is going to 25,000 – or crashing down to 5,000? Ignore them. “Experts” who make claims like that are nothing but crystal ball gazers. They have no more insight as to where the market is heading than you or anyone else, but they sure think they do.

But, that doesn’t mean that they’re harmless. Since they deal primarily in hyperbole, they can get your attention easily. After all, no one ever wants to get caught napping while big things are happening. And if a self-styled expert can cast himself as credible, you may just decide that he’s someone who knows what’s really going on.

If you want to be a successful investor, particularly on a long-term basis, you’ll have to learn how to tune out this kind of chatter. All it does is distract you from your own investment goals and strategies, and that won’t help you in the long run.

6. Continue Investing in Your Portfolio No Matter What the Market is Doing

A portfolio that is growing through a combination of investment gains and regular contributions can grow dramatically. You should never allow the direction of the market to affect your contributions – but sometimes that’s exactly what happens.

Both bull markets and bear markets can cause you to be hesitant to continue contributing to your portfolio:

• During bull markets, strong investment returns can easily convince you that continued contributions are no longer necessary.
• During bear markets, you may become convinced that contributing to your investment portfolio is an exercise in throwing good money after bad.

Both assumptions are completely counter-productive. Contributing to your portfolio during a bull market will not only cause your portfolio to grow faster, but it will also provide you with fresh capital for more investments.

Continuing to contribute to your portfolio during a bear market is even more important. If your portfolio is falling in value due to negative returns, your contributions will be the only factor that minimizes the decline. Even more important, the new cash that you put into your portfolio will represent capital to buy stocks at deep discounts when the market is at the bottom, and finally begins to move in an upward direction.

7. Think Long-term

Probably the worst delusion that can affect any investor is the “get rich quick” mentality. It’s especially hard to resist during bull markets. Everywhere you look, there are experts promising that you can double or triple your money in just one or two years by following their plan. It’s utter nonsense!

Like paying off a mortgage, building a career, or raising a child, successful investing requires both time and patience. You should never measure your time horizon in months, or even years – but rather in decades. By investing $10,000 per year in an index fund with an average rate of return of 8% over 30 years you will accumulate nearly $1.25 million. That may not be get-rich-quick, but it is a way to get rich – and that’s what really counts.

Making Your Investment Strategy Work for You

You’ll have to adopt a long-term view, and maintain the discipline to contribute your savings plan each and every year, and not allow yourself to get sidetracked by various get rich quick schemes along the way.

If you are already doing that, then you are on the right path. But you might have to use some of the strategies above to tweak your investment returns to higher levels.

Source: http://www.doughroller.net/investing/7-ways-to-improve-your-investment-returns/

How Warren Buffett Chooses a Great Stock, in 4 Steps

Warren Buffett is one of the most brilliant investors of all time, yet his investing strategies are simple.

In an episode of their podcast “We Study Billionaires: The Investors Podcast,” host Preston Pysh and Stig Brodersen delve into the four rules Buffett follows before making a stock pick, citing “The Snowball: Warren Buffett and the Business of Life,” by Alice Schroeder and Buffett’s foreword of “Security Analysis,” by Benjamin Graham.

While Buffet doesn’t recommend that the typical investor cherry-pick stocks — he prefers conservative bonds and low-fee index funds for that purpose — Pysh and Brodersen emphasize that he makes sure to follow each of these four rules before investing in any company:

1. Invest in companies with vigilant leadership.

“The first rule is that the company has to have vigilant leadership,” explains Pysh, founder of BuffettsBooks.com. “Everything within the company starts at the top and reflects the lowest position of the company. Finding the right leader of a company and organization is vitally important to Buffett.”

The renowned investor will look at the top of the company — at the CEO and the chairman of the board of directors. He looks at their salaries, whether or not they’ve kept company debt in check, and their past decisions, which give him a good idea of how prone to risk the company is.

2. Invest in companies with long-term prospects.

The next crucial thing to look at is whether or not the company will be able to sell their product in 30 years.

A good question Buffett likes to ask is, “Will the internet change the way we use the product?” If the answer is yes, that means the product could soon become irrelevant and you might not want to invest. This is one of the reasons he chose to invest in Wrigley’s gum because chewing gum will be around for a very long time.

3. Invest in stable stocks.

“The third rule is that the stock should be stable and understandable,” explains Brodersen. To figure this out, he looks at the company’s metrics over the past 10 years to make sure its earnings have been consistent and trending in the right direction. 

To help you see a company’s stability for yourself, Pysh and Brodersen built a stability calculator.

4. Invest in stocks with an attractive intrinsic value.

Finally, Buffett predicts the intrinsic value of the company — what it will be worth in the future. If he can buy the stock for much lower than the intrinsic value, he’ll consider investing.

“A dollar tomorrow is not the same as a dollar today,” emphasizes the podcast hosts. If you’re interested in the intrinsic value of your investments, Pysh and Brodersen also built an intrinsic value calculator.

Why Invest For Dividend Income?

Why are dividend investors fanatical about rising dividend income?

The answer illuminates why dividend investing continues to attract new adherents.

Simply put, dividend investors realize that investments should pay you real money. Too often, people approach the stock market as the world’s largest virtual casino.

The World’s Largest Virtual Casino

It is very easy to think of each stock ticker as a virtual bet. Sometimes, the price rises, and sometimes it falls. It all feels so random. It is the same feeling you get in Las Vegas… You either get lucky and win money, or you don’t.

Stocks are much more than virtual lottery tickets.

Buying a share of stock entitles the investor to a fractional share of ownership of a business. When you buy a stock, you are investing in a real-world business.

Business and gambling are very different. Businesses earn money when they provide services or products that their customers are happy to purchase. If a business is run well, it will continue to grow larger. If it is run poorly, it will eventually decline.

Notice the stark difference between business and gambling. In business, success depends on serving your customers better or more efficiently than your competitors. Sure, there is some luck involved, but intelligence and hard work will lead to favorable results.

Gambling is completely different (this does not include games played against other people instead of the house, like poker). The odds in gambling are set. You will lose over time. There is no amount of skill that can make someone a winner playing slots or roulette. You will lose if you play long enough. The house always wins.

The stock market is not a large casino, even though many investors treat it that way. The stock market allows people to purchase small percentages of the world’s greatest companies (or mediocre companies, if you want).

Dividend-Paying Businesses

At this point, hopefully, readers see the difference between buying random stock tickers and investing in sound businesses to take advantage of their attractive economic prospects.

Dividend-paying businesses are different than non-dividend-paying businesses. First, for a business to pay a dividend for any lengthy amount of time it must be profitable. Businesses that lose money simply cannot pay dividends for any meaningful length of time. Unprofitable businesses will run out of money and declare bankruptcy faster by paying dividends.

Profitable businesses, on the other hand, can return profits to their owners by paying dividends. A dividend payment is the return of profits to the owners of a business. As a shareholder, you are an owner.

Take Coca-Cola (KO) as an example. Coca-Cola pays out 64% of its earnings as dividends. Every time someone buys a Coke, Coca-Cola shareholders get 64% of the profits paid to them.

You may be wondering, what happens to the other 36% of Coca-Cola’s earnings? If shareholders own the company, why aren’t 100% of earnings paid out to shareholders as dividends?

Reinvesting Earnings for Future Growth

The reason Coca-Cola does not payout 100% of its earnings as dividends is that the company’s management attempts to maximize the long-term value of Coca-Cola shares.

To do this, Coca-Cola needs to grow. Coca-Cola’s managers have estimated that the optimal amount of profits to reinvest in the business is around 36%. This money goes to repurchasing shares, building up cash balances for stability, repaying debt, and investing in future growth.

Coca-Cola is expecting earnings-per-share growth of 7% to 9% a year. The company will likely grow dividends at around the same rate.

If Coca-Cola paid out 100% of its earnings as dividends, it would have a yield of 5.1%. Coca-Cola stock currently has a yield of 3.3% and is expected to grow at 7% to 9% a year. In 10 years, Coca-Cola shareholders will have a yield on cost of around 7.1% thanks to growth. If the company paid out all of its dividends and reinvested nothing in growth, shareholders would be worse off in 10 years than if Coca-Cola does reinvest some of its earnings for future growth.

Why Invest for Dividend Income?

Investing for dividend income places focus on what matters in investing – a businesses’ ability to generate growing income over time. Dividend investors look for businesses that will be able to pay increasing dividends because the business is growing its income.

This eliminates unprofitable businesses from consideration for dividend investors. Avoiding the worst businesses is certainly a good start in not losing money investing. If you aren’t losing money, you will end up making money.

Dividend-paying businesses also produce passive income. Dividends roll in each month or quarter, without you doing a thing. Over time, this passive income stream will grow as the businesses grow, and as you invest additional money. This ‘snowball effect’ results in a compound growth of passive income.

The ultimate goal of dividend investing is to be able to live off the passive dividend income your portfolio generates. The speed at which a dividend investor reaches this goal depends on a few key variables:

• What your monthly expenses are (the lower, the better)
• How much you save every month (not how much you make)
• How quickly your dividend income grows

Why invest in dividend income? Because you will build a growing, passive stream of income while focusing on what makes investments successful.

Source:http://www.talkmarkets.com/content/us-markets/why-invest-for-dividend-income?post=67248