Investment Returns: Five Ways To Improve Your Portfolio Returns and Lower Your Risk

by Alexander Green, Chairman, Investment U
Thursday, May 24, 2007: Issue #677

The S&P 500 notched an all-time high Monday, passing its record close of 1,527.46 for the first time since March 2000. It’s not the only index on a roll

The Dow’s climbed higher in 30 of the last 38 sessions, reaching new highs on practically a weekly basis. The S&P Mid-Cap 400 and Small-Cap 600 indexes are at or near all-time highs. And international stocks are ripping higher, too…

In the last six months, the Shanghai Index has doubled. The Nikkei is up by double digits. And since April, India’s Sensex is up 15%.

How long will this party last?

No doubt, optimism is high on Wall Street right now. But predicting what the market will do tomorrow, next week or over the next six to 12 months isn’t a particularly profitable exercise.

Frankly, market timing is a mis-allocation of your time.

As I’ve said before, anyone can call a market turn occasionally. But no one does it with any consistency.

Still, as equities across the board tread into uncharted territory, now is a good time to review a few of our time-tested strategies for increasing your investment returns and reducing your portfolio risk.

These five reminders can do more than anything to keep your money safe and your investments sound. And they’ll increase your overall return, too…

5 Ways To Improve Your Investment Returns and Reduce Portfolio Risk:

• Buy quality.In market downturns, dividend-paying blue chips hold up better than up-and-comers. Large caps will do better than small caps. And value generally does better than growth. If anything in your equity portfolio needs to go, look at your small-cap stocks, unprofitable companies and other more speculative issues.
• Diversify broadly.A high number of stocks has two advantages: It increases your chances of holding a big winner, and it leads to less volatility than holding just a handful of stocks.
• Asset allocate.We’ve beaten this drum many times, but it simply can’t be said often enough. Your asset allocation is your single most important investment decision. We currently recommend that 60% of your money should be in stocks; 10% should be in high-grade bonds; 5% should be in real estate investment trusts; 10% should be in inflation-adjusted Treasuries; 5% should be in gold shares; and 10% should be in high-yield bonds.
• Follow our position sizing strategy.Never invest more than 4% of your equity portfolio in a single stock – at least initially. There’s nothing worse than having a serious dent in your net worth simply because one stock fell out of bed.
• Use our trailing stop discipline.Whenever a stock in our Trading Portfolio falls back 25% from its high – or from our entry price – we put out a Safety Switch Alert, our name for a trailing stop, which tells you to sell at market to protect your profits or your principal.

This is simply a tool to cut your losses and let your profits run. I’ve never seen great results come any other way. Looking over this list, you’ll notice there are no Fibonacci numbers. No urgent market signals. No prophesies of doom or euphoria. And that’s exactly the point.

The principles of successful money management have stood the test of time. They’re battle-tested. That’s why they’re principles… not fads.

Good Investing,

Alex

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