Ten Tips For Improving Returns
Here are 10 ideas for making an intelligent review of your portfolio and doing some tinkering that might improve your returns without raising your risk level.
1. Eliminate Stub Positions
A "stub position" by definition, is a holding that accounts for less than 1 percent of your portfolio. Stub positions tend to drain your profits. For example, if a 0.5 percent stub position triples, it increases the value of your portfolio by a mere 1 percent - which is a terrible waste of a triple!
Some people tend to spend roughly the same amount of time studying each of their stocks. For them, a stub position may take away time and energy better spent elsewhere. Other people virtually ignore their stub positions - but that can lead to nasty surprises.
So check your portfolio for stub positions and either increase them to at least 1 percent or else get rid of them.
2. Own from 20 to 40 Investments in Your Portfolio
If you own fewer than 20 stocks, your portfolio may not be diversified enough - though you can solve that problem by including some ETFs and/or mutual funds in the mix. If you own more than 40 investments, chances are you're not going to be able to spend enough time keeping track of each.
One benefit of having a diversified portfolio is that any single stock cannot lose you more than 100 percent of your initial stake, but it can gain you more than 100 percent. If you only own a handful of stocks, you have less chance to take advantage of that fact.
3. Have a Cooling-off Period
At the moment you decide that buying a certain stock would be a good idea, start your mental stopwatch. Wait at least 24 hours and perhaps as much as a week. Then reassess to see if the buy rationale still seems compelling. Otherwise, you will wind up with a portfolio full of impulse purchases.
If a waiting period is a good idea for the purchase of handguns, it's an equally good idea for the purchase of common stocks.
4. Own Some Non-U.S. Stocks
It's easier today than in the past for Americans to own stocks of companies outside the U.S.. An increasing number of major European and Asian companies trade in the U.S. in the form of American Depository Receipts.
If your portfolio is too all-American, you are tied to the fortunes of a U.S. stock market that is somewhat high at the moment. You also miss some major values that may be available abroad. Because the U.S. has a relatively mature economy, you may be able to pick up some faster growth by investing in stocks in Asia, Latin America and Europe. This raises the risk level of your portfolio, but that risk is at least partially offset by the fact that you are no longer putting all your eggs in one basket.
5. Be Ambitious
Don't buy stocks hoping for a 15 percent or 25 percent gain. That's a game that brokerage houses like you to play - because it makes you trade more often - but it's really foolish.
6. Stick With Your Asset Allocation
Decide on a mix of stocks, bonds and cash that suits your temperament, age, health status, timing of expenditures such as college tuition, and need for current income. Then try to stick with that mix, making adjustments once or twice a year. This makes you buy a little more of assets that have declined and take a few chips off the table for assets that have risen. In most market conditions, that will enhance your returns.
7. Be Patient
Don't trade too much, don't sell too soon, and don't buy too fast. John Templeton, one of the great value investors, liked to say that he wouldn't sell a stock unless he had spotted another stock that was twice as good a bargain.
For many individual investors, it costs 1 percent to 3 percent of your money to buy a stock and another 1 percent to 3 percent to sell. So the in-and-out cost ranges from 2 percent to 6 percent. In almost every sense of the word, the stock market is a game of percentages.
The cost of trading is one major reason so few investors manage to beat the market averages.
8. Keep A Source File
Try to write down where you got the idea for purchasing each stock in your portfolio. If you have time, also do this for stocks you've owned in the past. Then evaluate how the stocks from each source did. Soon you'll be paying more attention to the sources - brokers, magazines, Web sites, or whatever - that served you well, and less attention to those that have served you poorly.
9. Check On Custody
Frauds come and go, but they never totally go away. So take just a moment to see that your holdings have a proper custody arrangement. If you choose, an individual broker, money manager or financial planner may have the ability to trade your account. But he or she should never actually have control of your money. It should be in custody of a third party, such as a bank or major brokerage house.
<10. Buy What's Unpopular
You rarely get rich buying what everybody else already loves. But you sometimes get rich buying what everybody else hates. But if you want to buy low and sell high, you often need to buy stocks when there is some danger present. Then you do your best to evaluate the danger to see how lethal and how long-lasting it is likely to be. If it's a passing thunderstorm, it may be a buying opportunity.
* * * * *
1. Eliminate Stub Positions
A "stub position" by definition, is a holding that accounts for less than 1 percent of your portfolio. Stub positions tend to drain your profits. For example, if a 0.5 percent stub position triples, it increases the value of your portfolio by a mere 1 percent - which is a terrible waste of a triple!
Some people tend to spend roughly the same amount of time studying each of their stocks. For them, a stub position may take away time and energy better spent elsewhere. Other people virtually ignore their stub positions - but that can lead to nasty surprises.
So check your portfolio for stub positions and either increase them to at least 1 percent or else get rid of them.
2. Own from 20 to 40 Investments in Your Portfolio
If you own fewer than 20 stocks, your portfolio may not be diversified enough - though you can solve that problem by including some ETFs and/or mutual funds in the mix. If you own more than 40 investments, chances are you're not going to be able to spend enough time keeping track of each.
One benefit of having a diversified portfolio is that any single stock cannot lose you more than 100 percent of your initial stake, but it can gain you more than 100 percent. If you only own a handful of stocks, you have less chance to take advantage of that fact.
3. Have a Cooling-off Period
At the moment you decide that buying a certain stock would be a good idea, start your mental stopwatch. Wait at least 24 hours and perhaps as much as a week. Then reassess to see if the buy rationale still seems compelling. Otherwise, you will wind up with a portfolio full of impulse purchases.
If a waiting period is a good idea for the purchase of handguns, it's an equally good idea for the purchase of common stocks.
4. Own Some Non-U.S. Stocks
It's easier today than in the past for Americans to own stocks of companies outside the U.S.. An increasing number of major European and Asian companies trade in the U.S. in the form of American Depository Receipts.
If your portfolio is too all-American, you are tied to the fortunes of a U.S. stock market that is somewhat high at the moment. You also miss some major values that may be available abroad. Because the U.S. has a relatively mature economy, you may be able to pick up some faster growth by investing in stocks in Asia, Latin America and Europe. This raises the risk level of your portfolio, but that risk is at least partially offset by the fact that you are no longer putting all your eggs in one basket.
5. Be Ambitious
Don't buy stocks hoping for a 15 percent or 25 percent gain. That's a game that brokerage houses like you to play - because it makes you trade more often - but it's really foolish.
6. Stick With Your Asset Allocation
Decide on a mix of stocks, bonds and cash that suits your temperament, age, health status, timing of expenditures such as college tuition, and need for current income. Then try to stick with that mix, making adjustments once or twice a year. This makes you buy a little more of assets that have declined and take a few chips off the table for assets that have risen. In most market conditions, that will enhance your returns.
7. Be Patient
Don't trade too much, don't sell too soon, and don't buy too fast. John Templeton, one of the great value investors, liked to say that he wouldn't sell a stock unless he had spotted another stock that was twice as good a bargain.
For many individual investors, it costs 1 percent to 3 percent of your money to buy a stock and another 1 percent to 3 percent to sell. So the in-and-out cost ranges from 2 percent to 6 percent. In almost every sense of the word, the stock market is a game of percentages.
The cost of trading is one major reason so few investors manage to beat the market averages.
8. Keep A Source File
Try to write down where you got the idea for purchasing each stock in your portfolio. If you have time, also do this for stocks you've owned in the past. Then evaluate how the stocks from each source did. Soon you'll be paying more attention to the sources - brokers, magazines, Web sites, or whatever - that served you well, and less attention to those that have served you poorly.
9. Check On Custody
Frauds come and go, but they never totally go away. So take just a moment to see that your holdings have a proper custody arrangement. If you choose, an individual broker, money manager or financial planner may have the ability to trade your account. But he or she should never actually have control of your money. It should be in custody of a third party, such as a bank or major brokerage house.
<10. Buy What's Unpopular
You rarely get rich buying what everybody else already loves. But you sometimes get rich buying what everybody else hates. But if you want to buy low and sell high, you often need to buy stocks when there is some danger present. Then you do your best to evaluate the danger to see how lethal and how long-lasting it is likely to be. If it's a passing thunderstorm, it may be a buying opportunity.
* * * * *
posted by Bob Moser at
9:03 PM
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