Seven Strategies to Grow Your Investment Portfolio, with default sponsor user Federal Retirement News
The dream of most investors is to see their investments grow exponentially over time. They wish to have their initial investments back in multiple folds to achieve their short-term and long-term financial goals and obligations. There are many ways to do this, with different factors deciding the best strategy for individual investors. These factors include investors’ risk tolerance levels, amount of initial investment, and time horizon.
What is Growth?
In the investment industry, growth can be measured in different ways. The first and most general sense of growth is an increase in the value of an asset. For instance, the interest received on a certificate of deposit (CD). However, a more specific definition of investment growth is capital appreciation. Capital appreciation occurs if there is a general increase in the value or price of the invested money over time. Investment portfolios grow in the short term and long term. The latter is usually easier to achieve and carries lesser risk than the former.
If you are looking to grow your portfolio, there are several ways you can achieve that. Some investment-building strategies have more risks, and some take time before results begin to show. Here are seven of the tested strategies for growing your investments over time.
Buying and Holding
This strategy is a simple and effective one for building an investment portfolio over time. As an investor, if you buy stocks or other investment assets and simply hold on to them, regardless of short-term price fluctuations, you would most likely see immense growth in your portfolio with time. A significant advantage of this strategy is that it requires little monitoring.
Timing the Market Correctly
This investment strategy has more risks than buying and holding and, often, better returns. Investors who wish to use this strategy have to follow and correctly time the market. They have to know when prices are generally low to buy low and sell high. Investors could also concentrate on one investment asset instead of the general market with the same aim—to sell high and buy low.
However, the strategy is only advisable for experienced investors who have enough time and knowledge about the asset in question or the general investment market. For new investors, it is advisable to go for other less time-intensive strategies.
Diversifying Your Portfolio
A diversified investment portfolio may drastically reduce the risks that come with investing. For instance, a diversified portfolio can reduce company risk, which is the risk attached to buying the stocks of one company. If one asset performs poorly in a diversified portfolio, the other assets will compensate for the loss. More often than not, investors combine diversification with the buy-and-hold strategy.
As many studies have shown, asset allocation is an important strategy in diversification. Asset allocation is an investment strategy where investors determine the amount of their investment that goes into a particular asset category. Investors share their investments within different asset categories such as cash, bonds, and stocks, depending on their risk tolerance, time horizon, and financial obligations.
These categories have different risk and return levels. For instance, investors who want to go in for a long-term haul with fewer risks can do so with Treasury bonds. Those who are in for the short term can do so with cash equivalents and short-term Treasuries. Stocks and corporate bonds, on the other hand, have higher risks and return levels. So, an investor must carefully determine their financial goals, risk tolerance, and how long they wish to invest to properly allocate their investment to each category.
After proper allocation, a portfolio also has to be adequately diversified. An investment portfolio with a mix of bonds, stocks, and cash has more chances of growth with less volatility and risk than one entirely invested in stocks.
Target Growing Industries
Another excellent investment strategy is to invest in industries and sectors that have higher possibilities of growth. These include sectors like healthcare, construction, small-cap stocks, and technology. Investors who properly invest in these sectors can easily gain more returns compared to those who invest in more stable industries. However, they also face more risk and volatility. But even the risk can be reduced for investors who invest carefully and hold over time.
Dollar-Cost Averaging
Dollar-Cost Averaging is fairly popular with people that invest in mutual funds. For this strategy, investors designate a specific amount for one or more funds. This same amount is used to purchase the shares over time, no more, no less. This strategy protects investors from spending too much money when prices are high. It also helps them buy more when prices are low.
As a result, investors that use this strategy get more returns over time since they buy low. Dollar-Cost Averaging also reduces the need to worry about market dynamics or market timing.
Target the Dogs of the Dow
The Dogs of the Dow are the ten companies with the lowest dividend yields in the Dow Jones Industrial Average Index. Investors who purchase the stocks of these companies at the beginning of the year and make simple changes in their investment portfolio yearly may be able to beat the index’s returns over time. This has happened several times in the past, though it does not occur every year. This strategy is stipulated in Michael O’Higgins’ “Beating the Dow.”
Investors who cannot do their research on the “Dogs of the Dow” can purchase one of the many Unit Investment Trusts (UIT) or the Exchange-Traded Funds (ETF) that follow the same strategy.
Follow the CAN SLIM Strategy
Investor’s Business Daily’s founder, William O’Neil, developed an investment strategy with the acronym CAN SLIM. The acronym stands for:
• C: stands for Current quarterly earnings per share, which O’Neil states should be around 18-20% higher than the previous year’s figure.
• A: stands for Annual earnings per share, which should have shown material growth over the previous five years.
• N: stands for New goings-on—which means that the company should have new products, services, management, or anything that can help sell the shares to the public.
• S: stands for Shares outstanding, the number of a company’s shares held by all its shareholders. O’Neil states that a company that expects high profits in the future would be trying to repurchase its shares outstanding.
• L: stands for Leader. A company that is a leader, not a laggard in its category, is worth investing in.
• I: stands for Institutional sponsors. On this, O’Neil says a company should only have a few institutional sponsors, not too many.
• M: stands for the market. O’Neil says investors should also look at how the market affects the stocks they are purchasing. Investors should examine when a company’s stocks can be bought or sold to decide if it is worth investing in.
The strategies mentioned in this article are some of the simplest strategies for building your investment portfolio. There are some other more advanced strategies that financial institutions and individual investors use to grow their portfolios. Some of these strategies use derivatives and other instruments to regulate the risk level and increase returns. A stockbroker or financial advisor can help you decide on the best strategy for building your investment portfolio.
