Your own collection of investments is known as your portfolio, and there are many different strategies you can employ to increase your portfolio's returns. This article will not be a comprehensive list but rather an introduction.
There are many different asset classes that you can choose to invest in. The basic ones are real estate, stocks, bonds, crypto, commodities, and cash. Each asset class has different risk and return characteristics.
Real estate represents a physical piece of property. Real estate investors buy property such as land or buildings in order to either rent the property out or to sell the property at a future date. In both cases, the investor is hoping that the value of the property will increase over time. Real estate is a popular investment because it is considered to be less risky than other asset classes.
A stock represents a piece of ownership in a company. A company can raise capital in the stock market by selling shares of ownership. When a company sells shares, they are issuing equity. The corporation is selling a piece of itself. If the company performs well, the value of the stock increases. If the company performs poorly, the value of the stock decreases.
Bonds are a loan to a corporation or government. When you buy a bond, it is basically a loan to the issuing entity. The entity will pay you interest on the loan and return the loan at a specific time in the future. You can think of interest as a fee for loaning money. The interest rate is determined by the yield, which is the expected return of the bond. Bonds are a popular investment because they are perceived as being less risky than other asset classes.
Crypto is a new asset class that consists of digital currencies like Bitcoin. Crypto is a very risky asset class. It has a high expected return but it also has a high degree of volatility, which means it can change rapidly and unpredictably. Crypto has a low correlation to other asset classes, which means it doesn’t necessarily rise or fall when they do. Only invest in crypto if you have a high risk tolerance and a long time horizon.
Check out our article what is crypto for more information.
Commodities are a type of asset class that includes various raw materials such as oil, gold, soy beans, etc. These are traded on exchanges like stocks. There are many different types of commodities. Some commodities are used as currency; others are used as inputs to separate products. Some commodities, like gold, are used as stores of value.
Cash is an asset class that has a negative expected return as a result of monetary inflation. However, cash generally has little short term risk. You should not invest in cash unless you expect to hold it for a short period of time.
- Passive Investing - A strategy whereby you try to maximize the returns of the market without taking any significant risks.
- Active Investing - A strategy whereby you try to beat the market by picking out individual assets and/or asset classes that will yield either higher or lower returns than the market.
Passive investing is the strategy of buying into the market as a whole (or some subset) with the goal of getting the market's average returns.
There are several different ways you can do this. One is to just buy an index fund. These funds, like the S&P 500, will simply buy the 500 stocks included in the index and thus you will get the average returns of those 500 stocks. This is the most popular and passive way to invest.
Another way would be to take the market as a whole and pick out the least volatile stocks. In theory, the less volatile the stocks, the less risk you will face and thus the more consistent return you will see. A strategy like this would be to create a portfolio of the least volatile (low Beta) stocks and hold them.
The third way is to buy an index fund that is composed of the stocks whose earnings are growing at the fastest rate.
Active investing is the strategy of trying to beat the market by picking out individual stocks and/or asset classes that will yield either higher or lower returns than the market. There are a few ways you can do this.
One way is to find an individual stock or asset that is underpriced by the market. In other words, it is trading below its fair value. You can do this by doing your own research and calculating the fair value of the asset. If the asset is trading at a price below its fair value, you have found a great investment opportunity.
Another way is to buy a basket of assets that are not correlated to each other, so that a bad return in one can be offset by a good return in another. This is a good way to limit risk, but doesn't help much with getting higher returns.
A third way is to try to time the market. The idea here is that you can buy an asset right before it is about to increase in price. You can do this either by using technical analysis or by using fundamental analysis.
Technical analysis is the process of analyzing an asset based on its price history. The idea is to use this price history to predict the future price. You can use technical analysis to try to find buy points (when the price is increasing), sell points (when the price is decreasing), and trend changes.
For example, you could look at a stock's past price history to see if it has been increasing at a steady rate. If it has, you may try to buy the stock after it has hit a low point. In theory, the price will continue to increase and you will make a profit.
Fundamental analysis is the process of analyzing an asset based on its fundamentals (earnings, assets, etc). The idea is to use these fundamentals to predict the future price. For example, you could look at the earnings of a company and try to predict the future stock price based on how well the earnings are doing.
Another example would be to look at a company's assets and predict the future stock price based on the assets. For example, if the company has a lot of land, you could predict that the land will increase in value and thus the stock will increase in value.
Choosing a Strategy
There is a lot of debate as to whether active or passive investing is better. Many experts argue that, in the long run, active investing is not worth the effort. They argue that, in the long run, passive investing will always beat active investing. Thus, in the long run, it is best to just invest passively.
However, if you have the money and time, it may make sense to take on the risk of active investing. When done well it can be very profitable. If you can find the next Microsoft or Google, it can be very profitable to invest in it early.
Another reason to choose active investing is if you want to have more control over your investment. If you are investing a large amount of money, you may want to make your own decisions on which stocks to buy and sell, rather than relying on someone else's decisions.
If you haven't already, take a look at our article on risk and reward next.