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Thayer Partners Blog

How to Potentially Increase Your Portfolio's Growth by 20% and Lower Your Risk

[fa icon="calendar"] Dec 2, 2016 9:00:00 AM / by Chris Wilmerding

Chris Wilmerding

How-to-Potentially-Increase-Your-Portfolio's-Growth-by-20%-and-Lower-Your-Risk.jpgInvestors face myriad challenges today as they attempt to earn high returns in order to fund their retirement. With low interest rates, high fees, and difficult-to-understand investment products, it can be tough for investors to increase their portfolios’ growth. Most want to grow their nest eggs, but don’t know how to get higher returns.

These two simple investment strategies can help you increase your investment portfolio’s growth by 20% and lower your risk.

Invest in Funds That Replicate a Stock Index

Far too many stock mutual fund managers charge 1% or more per year. If you’re hoping to earn a solid 5% on your stocks after inflation, then paying this additional 1% can have devastating consequences—it can mean that you’re potentially giving up 20% of your real return.

Of course, mutual fund managers do aim to do better than stocks on average. But the reality is that the majority of fund managers will underperform benchmark indexes, such as the S&P 500. In fact, they fail to meet their benchmarks 50% to 90% of the time. In essence, you end up paying higher fees for poorer performance when you invest in actively managed mutual funds.

In order to keep a fair share of your return, invest most of your money into funds that replicate a stock index, at a lower cost. %. Some target-date funds, too, combine bond, stock, and foreign-stock index funds for less than 0.2%.

If your 401k plan does not offer you the choice of investing in low-cost funds, or adds on a lot of other administrative costs, then you could use the plan up to the employer match, and then place the rest of your savings in an IRA, where you can control your fund choices.

Lower Your Risk with Asset Allocation to Achieve Diversification

Asset allocation is one of the most important investment decisions you could make. The way in which you allocate your investments is primary, with the selection of your securities being a far secondary consideration.

Asset allocation consists of adding many different asset classesto your portfolio in order to diversify your risk. Some of these asset classes include commodities, global bonds, international stocks, and US small stocks.

Considering asset classes often have diverse correlations to one another, adding a mix can significantly reduce your portfolio’s risk or volatility while also improving your expected return, especially over the long term. The concept behind asset allocation comes from the idea that while one asset class might perform poorly for a while, and another might perform extremely well during the same period, only to have the trend reverse. By spreading your risk among different asset classes, you can avoid being overly exposed to downturns in any given investment area.

There is no simple formula for identifying the right asset allocation plan. In fact, there are many asset allocation strategies that could work for you, including buy-and-hold, tactical asset allocation, constant-weighting allocation, and dynamic asset allocation. Determining your risk tolerance and goals is key to understanding how you should diversify. While some investors can handle a lot of volatility, others cannot. Your financial advisor can help you create an asset-allocation plan that works best for you.

Portfolio investing has become more sophisticated (and complicated) over the past few decades. However, there are still simple strategies that investors can use in order to boost growth and improve investment returns. Invest in index funds and diversify your portfolio, and your growth could potentially increase by 20% and lower your risk.

Investing in alternative investments may not be suitable for all investors and involves special risks, such as risk associated with leveraging the investment, adverse market forces, regulatory changes, and illiquidity. There is no assurance that the investment objective will be attained.

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Topics: Investments

Chris Wilmerding

Written by Chris Wilmerding

Chris Wilmerding is Principal of Thayer Partners, an independent investment management firm located in Westwood, MA providing financial planning and wealth management counsel to individuals and their families.

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