Focus on Alfa – Portfolio Strategy 2021
Alpha is considered the active return on an investment. It measures an investment’s performance against a market index or benchmark that is considered to represent the market's overall movement. Factor-driven alpha investment strategies are designed to manage portfolio risks while also delivering market-bearing returns. This task is generally left to financial managers, but in today’s turbulent markets, investors would be wise to learn how they themselves can generate alfa for their investment portfolios. Below we list 4 factors to keep in mind when setting up your investment portfolio for 2021 and the years ahead.
A tax-efficient portfolio enables you to keep more of your profit by paying less tax. You can accomplish this through simple asset allocation. Various investment vehicles such as exchange traded funds (ETFs), which automatically track a stock index and produce moderate profits, are better suited to a taxable account. This means you pay taxes on any earned income now. On the other hand, long-term investment products like real estate investment trusts (REITs) or funds with high volatility or dividend income, are better suited to your tax-deferred, retirement portfolios. That means, you’ll pay taxes on your earnings only once you’ve entered retirement. Another way for investors to minimize their tax liability is to take advantage of and maximize their contributions to tax-advantaged savings and health accountsoffered through your employer or privately.
The S&P 500 has generated a robust 13% annualized gain over the past decade, higher than the historic 10% long-term average. Despite this, it is always wise to assume that growth will slow or even turn negative in the future. One way to hedge your portfolio is to keep cash on hand and increase your savings rate. Having additional cash savings will also allow you to take advantage of any market downturn and scoop up great securities at great prices, increasing your profits down the road.
The availability of investment solutions for retail investors has widely increased, and in turn, associated fees have decreased. Today, it is much cheaper to invest than it was, say, 10 years ago, and it is now possible to have exposure to virtually all corners of the market. Investors can gain broad market exposure by investing in ETFs or low-cost mutual funds.
That said, it is always good practice to annually assess your portfolio to determine whether it is time to swapexpensive legacy positions for new low-cost assets. When it comes to generating profits, every penny counts, especially over time. Be sure you are not paying more than the industry averages, as this can substantially lower your investment returns.
Good investing requires good discipline and emotional control. It’s natural to want to sell off everything in your portfolio at the slightest hint of bad news. Likewise, it’s normal to want to go on a spending frenzy, taking on irresponsible amounts of risk, once optimistic news breaks. Don’t do either of these. Putting a portion of your investing on autopilot is a smart way to ensure you are regularly putting away money, but also keeping your emotions in check.
One way to automate your portfolio, is to set up automatic contributions, which are deducted from your paychecks and directly invested into the product of your choice. With this option, you can control the amount and frequency of your investment, as well as asset allocation. Investors can also sign up for “automatic escalation”, ensuring that they are contributing more money every year. The same automations can be set up in a private brokerage account by working with your financial advisor.
Another automation method to try out is the rebalancing process, which is essentially rebalancing your portfolio weightings as investment rises or decreases over time. If a fund is rebalanced, the owner purchases or sells securities in order to retain their initial allocation of assets. They are still selling high and purchasing low, which is a means to lock up money and recycle sales in underperforming investments. Rebalancing will take place at fixed times throughout the year or after an investment has met a certain percentage level compared to the rest of the portfolio.
Protect yourself against the times ahead by implementing these portfolio optimising strategies. Setting up a tax efficient portfolio, maximising your savings, taking care that you’re paying minimal fees and automating your saving and investment strategy, will help ensure you’re equipped to handle whatever the market throws at us.