3 Tips for Boosting Your Portfolio's Returns

The past couple of years have been tough on investor's portfolios. The recession had us concerned more for our homes and livelihood then our retirement accounts. But the worm is turning and we need to address post-recession investing in a mobile world. The old rules for better portfolio investing need to be addressed.

The Importance of Sector Rotation

Most individual investors who pick stocks do so because they have an IRA or some form of direct investing and have grown weary of mutual funds that never seem to live up to the hype.

Individual investors tend to be over 50 years of age and have had some inexperience in the stock markets. These investors also buy large capitalization stocks because their risk tolerance is low because of the small amount of years they have till retirement. But a lot of individual large capitalization investors of all ages never take into account sector rotation.

Sector rotation is the practice of buying best of class stocks in an in-favor sector. Sectors are classes of large capitalization stocks within an industry such as technology, energy, consumer goods, etc. that come into favor during certain parts of the economic cycle.

If you buy a best of class stock in an out-of-favor sector you might or probably will lose money. Why because the large institutional investors are buying based on the economic cycle as determined by the GNP growth rate and the reaction of the federal reserve to our money policy. For instance in a post recession world with the GNP rate increasing technology, chemical, and paper stocks start to heat up and become in-favor stocks.

This makes sense because business is starting to show growth in revenues and margins are expanding reducing price earnings (PE) multiples, which are the bell weather of stock analyst. As the PE drops to acceptable levels analyst recommend the stock and the professional investors are buying because of the promise of increased revenues and margins. More buying then selling means the price goes up.

The Absolute Necessity of Diversification

A real important rule for all investors is diversification. Diversification is a principal or rule of portfolio management that basically means not putting all your eggs in one basket. Things can happen which has an adverse effect on all stocks regardless of sector. The attack on the World Trade Center was one such event.

One event I was very close to was the Challenger Tragedy in which the shuttle's astronauts we're all killed right after lift off at the Kennedy Space Center. I was a stockbroker at the time and my office was right across the river and I saw it first hand and live. Defense stocks all took a hit and a lot of my investors were working at the space center were consequently laid off. They needed the money so sold stocks. Some got out very well because of the diversification of their portfolio's, but others all had money in their employer stocks like Martin Marietta, Rockwell, and other defense contractors working at the space center consequently losing a large portion of their investment.

The Necessity of Research

Research is the act of digging into the individual facts and circumstances of a company whose stock you intend to invest in for your benefit. Research includes, but is not limited to looking over the company financial statements, reviewing the history of the underlying stock prices, listening to the quarterly conference calls and more, which is readily attainable on the Internet.

Most people don't take the time to do this research and it can make or break your portfolio based on your luck. That is call gambling, but if you invest based on facts and circumstances of a company, instead of luck, you can more times then not get out of a position without losing money.

Stick to the basics when dealing with your money. You can always earn money in your portfolio using these three tips for better portfolio management.

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