How to Improve Your Investment Returns

By Diahann Lassus
CFP^®, CPA, Lassus Wherley & Associates, P.C.

May 31, 2001

We are all looking for ways to improve our returns in the current market environment and one of the most important ways to do this is asset allocation. Most people have heard about this investment principle but don't really focus enough attention on what it really means. This principle tells us that how we allocate our dollars across types of investments is more important than the actual specific investments we select. That really means we need to spend as much time deciding what percentage of our money is invested in different types of investments such as bonds, large cap growth, large cap value, mid cap, small cap, international, real estate or any other asset category as we spend in selecting the specific stock, stock fund or bond.

If you aren't quite sure where to start, check out some of the Web sites available online that provide software that allows you to look at the effect of different asset allocation models. Many brokerage firms and mutual fund families provide these types of services and can be at least a starting point to see where you are and estimate projected returns.

Another principle that is really important in finding ways to improve portfolio returns is diversification. Diversification starts with a basic concept of don't put all of your eggs in one basket and builds from there. Diversification is another important factor in building and managing a long-term investment portfolio and works hand-in-hand with the asset allocation model. However, for most individuals the more difficult question is "what does that really mean in terms of how I manage my own investments"?

Here are some things to keep in mind in building, reviewing and managing your investment portfolio:

All investments involve some level of risk. Make sure you understand what the risk in your portfolio really represents. It is much easier to accept a 5 percent loss than it is to accept a $50,000 loss. Think in terms of dollars and not just percentages.
You can literally reduce your risk and increase your return if you combine different types of investments in your portfolio like stocks and bonds and international. This is easy to forget when one type of investment is doing really well (like technology has done in the past).
Adding bond investments to your portfolio may actually help increase your return in very volatile markets and it can certainly reduce the risk.
Always maintain cash reserves in a money market or cash equivalents so you don't have to sell something at the worst possible time.
Don't be afraid to take profits. You can never lose money by taking profits. Even if you do have to pay taxes, profits are still a good thing.

In the current volatile environment, how can you take specific steps to improve the return on your investment portfolio and still try to control the level of risk you take? Here are some action steps to help you build a portfolio with potential for increased returns:

Review your current investments and make sure you have no more than 30 percent in any one type of investment such as large growth stock, large value stock, small cap growth stock, international stock, technology stock, or any other specific type of investment. If one investment type begins to take over your portfolio, it can significantly increase your risk level. Sometimes less is definitely better than more.
Review each specific individual investment and pay special attention to those that make up 10 percent or more of your portfolio. If one investment is this high a percentage or higher it can really increase the volatility and risk of your overall portfolio. Make sure it makes up 10 percent because you made a conscious decision and not because you haven't done anything recently.
If you defined your overall percentage targets per investment type for your overall asset allocation a year or two ago, compare the targets to where you are now. If you don't have targets, now is a really good time to develop them.
The process of defining objectives and building a diversified portfolio can increase your returns over time and decrease your volatility and risk. Be very specific about what you want to include in building your portfolio.
Allocate percentages to a broad mix of investments such as money market type investments, bonds, large cap stock (stock funds), mid cap stock (stock funds), small cap stock (stock funds), and international stock (stock funds) as a starting point. This type of portfolio is a broadly diversified investment mix.
Select investments based on how they fit your overall portfolio and not just based on the hot investments or the stock of the day.
Track performance of individual investments and set targets for taking profits or losses. It is easy to get trapped in a losing investment because it is too painful to deal with it.
Keep your eye on your investments to make sure you don't have too much money invested in any one type of investment. Many people allowed technology stocks or stock funds to take over their portfolio and paid the price with falling values.

Stay focused on your long-term investment objective, keep that percentage allocation under control and you will achieve a better return and maybe even reduce that risk at the same time.