Investing in the stock market is a risky business if you don’t know what you’re doing. Even if you do, it’s possible to lose a lot of money. Personally, I have moved away from individual stock picking for many years now, and embrace investing mechanisms that are proven to enhance investment performance and build wealth over time.
The following are the investing mechanisms and tactics that had helped me build wealth and boost my portfolio performance over the years:
In my opinion, the best way to build wealth is save money before you spend it. My two most important financial transactions — i.e., paying for mortgage and saving for retirement — are fully automated. My paychecks are deposited directly into my account, bills are paid automatically, and the remaining amount goes toward savings and investing.
By automatically investing your money on a regular basis (as I do with my 401k), you’re leveraging a mechanism that buys more shares when they are cheaper and less when they are more expensive.
The second mechanism relies on the wonder of compound interest. I instructed my broker to reinvest my fund distributions and stock dividend payments to buy more shares of the investment. By adding dividend payments and distributions back into my portfolio, I am setting myself up for potentially larger payouts in the future.
Do you wish you can buy low and sell high on a regular basis? You can, if you use asset allocation and rebalance your portfolio strategically. Asset allocation takes advantage of your assets’ different rates of return, as well as the differences in performance cycles, to create “Buy low, sell high” opportunities.
By rebalancing your portfolio to restore the original percentages, you are selling some shares of the good performers (sell high) to by some shares of the bad performers (buy low). Since it’s not possible to predict the next winner, you’re putting yourself in a better position to capture more gain.
Frugality works everywhere, including investing. One of the few predictable factors with regard to investing is your investment expense. You can choose a brokerage firm that charges lower trade commissions and investments that charge lower expenses (this is expressed as expense ratios for mutual funds and some ETFs). As such, this is a great way to improve your investment performance.
Based on my calculation, a reduction of O.5% on annual expenses over 30 years could increase your overall performance by a much as 14%.
Investing with tax efficiency in mind is another great way to improve performance. Here are several things that you could do:
Contributing money to your 401k to get your company match is probably the only free money you’ll get in the world of investing. If you are not doing it, you are leaving money on the table.
Do you have other surefire way to improve investment performance? Please share with us.
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The articles are written by personal finance enthusiasts (not certified professionals) based on their personal experience. What works for them may or may not work for you, and you should always consult a financial advisor before making important financial decisions.
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