As investors we all have the common goal of increasing our portfolio value. But how often do we really consider the factors that determine the value of our portfolio. Here are the five factors that affect the value of your portfolio more than any other components.
1. Years of Compound Growth
Exponential or compound growth is THE most powerful investment principle. Start your investment program early! Consider this: If you start at age 25, a $300 monthly investment earning 8% will build a one million dollar portfolio value at age 65. But if you wait until age 45 to start, it will require a 1,700 monthly investment to reach a one million dollar portfolio value by age 65.
2. The Amount of Money Saved
You can see from the example above that you can make up for time lost by saving more; but it’s much harder. Pay yourself first with an automatic investment plan. Get your household budget in order and save, save, save!
3. Your Portfolio Rate of Return
The miracle of compounded growth is affected by the length of time and the portfolio rate of return you achieve. It’s important to balance the desire for high returns with the risk of large losses.
4. Your Asset Allocation
How you divide your portfolio between different asset class categories is called asset allocation. Studies show your asset allocation will determine over 90% of your portfolio returns.
The volatility of a portfolio can be reduced by combining assets with low correlation. This allows a portfolio manager willing to take a set amount of risk to invest in higher risk/higher reward investments than they would otherwise
5. The Amount of Taxes You Pay
Try to keep investment taxes low. Take advantage of tax favored retirement accounts and long term capital gains. The more money you keep, the more money you have to compound its’ growth, hopefully tax free or tax deferred.
These are the five most important factors for increasing your portfolio value. All of these factors should be part of your investment planning.
Invest as early as you can, save as much as possible, optimize risk and returns through proper asset allocation and diversification, and keep investment taxes low. These are the most important factors in building wealth and increasing your portfolio value.