6 Ways To Improve Your Portfolio Returns Today

Today's investor is faced with several challenges as they look for a comfortable way to earn higher returns on their money above the current certificate of deposit (CD) and interest rates. Now-a-days, they'll find investment products that can't be understood, excessively high fees, high volatility in almost every market and products like hedge funds and derivatives that make everyone rich except for the investor. So, here are a couple of tips to help you improve your returns and possibly avoid some costly investment mistakes.

Equities Over Bonds
Despite the high volatility in the stock markets over the last decade, the equity markets have consistently outperformed the bond markets over time. While equities do carry higher risk than bonds, a manageable combination of the two in a portfolio can offer an attractive return with low volatility.

If we take a look at a broad investment period of 1926 (when the first tracking data was available) through 2010, the S&P 500 Index (500 U.S large cap stocks) achieved an average gross annual return of 9.9% while long-term U.S government bonds have averaged 5.5% for the same period.

If you then consider that the Consumer Price Index (CPI - a standard measure of inflation) for the same period was 3.0%, that would bring your adjusted real return down to 6.9% (stocks) and 2.5% (bonds). Inflation can erode one's purchasing power and returns, but equity investing can help enhance returns thus making investing a rewarding venture.

Figure 1: Average Annual Returns 1926-2010

Data Source: Dimensional Matrix Book 2011, S&P500 Index and Long-term Government Bonds from the "Stocks, Bonds, Bills, and Inflation Yearbook", Ibbotson Associates, Chicago.

Small Vs. Large Companies
If you look at the performance history of U.S. companies (since 1926) and international companies (since 1970) when index tracking data was first available, you'll find that small capitalization companies have outperformed large capitalization companies in both the U.S. and international markets. (more)