5 Strategies for Growing Your Investment Portfolio (and a Couple of Other Tips)
Growing your investment portfolio is no rocket science and it doesn’t have to be about intricate maneuvering based on insider information either. Below, we’ll give you a rundown of the 5 simplest and easiest ways to (more or less) safely increase the value of your investments/”passive” revenue sources.
If you are an investor who is satisfied with the current yield of his/her portfolio, and you’re not looking to tinker with a mechanism that already covers your needs perfectly, do not bother reading on. This article is aimed at those who want to somehow add value to their nest egg over time, thus increasing the yield too. Do not get us wrong: there is absolutely nothing wrong with sticking to a tried-and-true approach and not aiming higher. This article though is specifically about simple (and hopefully straightforward) ways to grow your portfolio, dissecting a number of approaches, considering the amount of principal invested, the risk appetite/tolerance as well as the time horizon of the exercise.
First of all: let us define the goal here. Growth can take a number of forms in the investment game, but it mostly refers to the increasing of your account value. Just think of a certificate of deposit, which pays you interest. Growth can be long – and short term, and while most investors dream about massive short-term growth, such a performance can only be attained at the cost of similarly massive risk.
Without any further ado though, let’s see HOW you can bring about portfolio growth.
1. Buying and holding is one of the simplest ways of achieving growth, and while it may appear to be sophomoric, over the long run it is in fact one of the most efficient such ways too.
The advantages of buying and holding are obvious: it requires no specialized skills and a minimum amount of effort. One does not need to constantly monitor the markets and short-term price-movements and the results – as said above – can be surprisingly good over the long-run.
Due to its relative rigidity, the buy and hold strategy carries certain drawbacks as well: if it is not combined with diversification, it can be sunk by company risk etc.
2. Market timing is in a way the other side of the Buy and Hold coin. Those who use this approach keep their eyes on the market at all times, with the aim of buying certain stocks/assets, when their price is low, and selling them when the price goes up. Those who are indeed good at this can generate consistent growth even if using a single stock/asset. The problem with market timing is that it is very time- and energy-consuming, and those trading this way need to possess certain skills. They need to be extremely good at technical and fundamental analysis for instance, and they need to possess a sort of feel for the overall market sentiment.
Market timing is aimed at short-term gains and in this regard, the strategy can indeed outperform buying and holding. It is most definitely not for the average investor though.
3. Diversification is a must to mitigate the risks entailed by even the most conservative (buy and hold) portfolio-growth strategies. Proper asset allocation has been proven to be a key factor in portfolio growth, especially in the long-run. Diversification is a lot like hedging: it assures long-term growth by eliminating volatility. Indeed, when properly picked, asset-classes tend to balance each other out: when one performs poorly, the other always does well.
An added tip in this regard concerns growth sectors. Though investing in technology, construction and healthcare stocks likely to see explosive growth can be included under the umbrella of diversification, it is a much more aggressive approach compared to garden-variety asset allocation.
4. Picking the proper stocks is always the Holy Grail of the investor. While there are countless strategies and theories making the rounds in this regard, there’s one based on cold, hard math and common sense, which offers a logical path. Called CAN SLIM, this take on stock picking sets out a number of conditions stocks need to fulfill, in order to be considered investment-worthy.
As you probably know, CAN SLIM is an acronym. C is from Current Earnings, which need to be 18-20% higher than they were a year ago. A is from Annual Earnings, while N stands for New (the company needs to have something new lined up: a product, a solution, a leadership change etc.)
S means that the company has to be looking to pick up its own Shares, L stands for Leader (the company has to be that, within its own vertical) and I means Institutional sponsors, which should be lined up behind the operation. M stands for the Market-savvy of the investor, who should understand the forces driving the market sentiment behind the given stock.
5. The Dogs of the Show theory singles out companies (more precisely 10 of them) from the Dow index, with the lowest dividend yield. When picked up at the beginning of the year, followed by annual portfolio-adjustment, such stocks have statistically been good performers, so much so in fact that several ETFs use this same investment strategy.
The bottom line (our final tip) is that you need to be aware of your limits/abilities in this regard. You know exactly how much time and effort you can invest into your portfolio-growth. Be informed and do not overreach. While some methods may dangle more rapid and substantial growth, they take more time and effort on your part, and they bring about more volatility. Know your goals, and choose the right method to achieve them.