personal finance articles

Is your money working as hard for you as you do for it? We all want to be “money smart”. Part of being money smart is investing your monies appropriately for your goals and objectives.

There are many ways to help improve investment portfolios for higher potential returns. Most important is to identify the goal of each investment. By clearly identifying the goal, the timeline and the amount of volatility or risk that is acceptable and viable, a more effective portfolio can be addressed or built.

In addition to addressing goals, objectives and risk tolerance, we recommend exploring 6 investment strategies designed to enhance potential returns and to attempt to minimize volatility or risk. Remember that investing does involve risks including the possible loss of principal amount invested.

1. Through research, technology and tools we establish the “Efficient Frontier”. This is based on Nobel Prize winner, Harry Markowitz and his research on combining various asset classes. This combination of asset classes creates an optimal blend called the “Efficient Frontier”. This blend can be tailored for conservative through aggressive investors. The right balance of various asset classes is what provides an efficient amount of growth while minimizing risk. It uses the theory of combining “Low Correlation” asset classes. This provides a balance in the event one of the asset classes experiences a sudden correction. When this happens, the opposite asset class usually experiences a slight uplift and growth… thus, providing market appreciation while minimizing overall portfolio risk/volatility.
2. Blend growth and value styles of money managers and companies. Growth managers tend to select fast growing growth markets while value money managers tend to buy companies “on sale”… meaning companies that are traded at a discounted price relative to their overall value. The growth manager is attempting to buy companies that should continue their appreciation and growth due to their favorable market position and/or market sector. The value manager wants a particular company that is “out of favor” to rebound and receive appreciation in that event. The goal of investing is to “buy low and sell high”. This blending of styles allows one to achieve growth when the market rallies and provides stable long term growth with fundamental investing through value managers and companies.
3. Invest with an international perspective. Globalizing your portfolio with the proper blend of international companies can actually reduce overall risk while potentially enhancing returns. This is done to diversify away from US currency risk and to allow participation in the global economy and developing areas of growth. Our economic environment is definitely a world market today. Many opportunities may be available overseas. It is suggested that a small percentage of your portfolio be invested in the international marketplace based on your overall risk tolerance. (Please note that international investing involves additional risks such as currency fluctuations, differing financial accounting standards and possible political and economical instability.)
4. Continually rebalance your portfolio to your proper asset allocation. According to research and historical performance, overall portfolio returns will be most strongly influenced by your asset allocation. Once allocated, returning to your original or updated asset allocation is crucial. This means keeping the proper percentage of your overall portfolio in each respective asset class. Over the course of time, high growth areas may have a higher percentage of the portfolio allocated if they have increased in value quicker than the rest of your portfolio. Rebalancing to the original allocation is a disciplined way to lock in its gains and keep your risk tolerance consistent with your actual portfolio allocation and in line with your investment objectives. We recommend rebalancing at least annually.
5. Consider the impact of taxes. Maximizing real returns is crucial to your portfolio. Real returns are measured by taking total returns and subtracting the impact of inflation and taxes. Making strategic moves in taking gains/losses becomes important to maximizing your overall long term return. Tax deferred investments can prove to be an excellent way to accumulate wealth. Consideration of income, potential social security and capital gain taxation are important elements to enhance your real rate of return.
6. Consider the use of complimentary asset allocation strategies. Strategic allocation establishes a blend of various asset classes for a portfolio and keeps those percentages fairly constant over the course of each year. Tactical allocation allows for more adjustments to the ratio or asset class percentages on an ongoing basis. This continual shifting is designed to alter the allocation to better position the portfolio for growth and/or protection based upon current market conditions. Statistically speaking, both asset allocation strategies help to manage a portfolio. And, dependent upon market forces each can have certain advantages.

The investment world can be complicated and difficult to manage. These strategies require careful planning and efficient utilization of good tools to analyze and provide research. With proper direction and implementation, investing effectively can be achieved in our turbulent market.

About the Author

Joel Magruder founded Financial Partners Group as a “team based” financial firm. Its mission is to bring the highest level of advice to clients in all areas of their financial lives.

Joel earned a Bachelor of Science from Iowa State University in 1988. He started in the financial services industry in 1989. Joel holds Series 7, 65, 63, and 24 securities registrations and is licensed for life, accident, health, property and casualty, and variable contracts. He has completed certification and earned the following designations: Certified Financial Planner, Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Chartered Advisor of Senior Living (CASL), Chartered Leadership Fellow (CLF), Life Underwriter Training Council Fellow (LUTCF), and Certification in Long Term Care (CLTC).