Sometimes the best and most profitable investment advice doesn't look like much, but it'll have a huge effect on your profit potential and correction resistance.
Today I'd like to talk about three simple, profit-boosting moves every successful investor regrets not making sooner.
My goal is twofold:
- To force you out of your comfort zone and away from the big risks most investors take inadvertently
- To move your money towards big windfall profits that can pay off year after year practically no matter what the markets throw at you
As always, I've got an exciting new investment to get you started, too.
Profit-Boosting Move No. 1: Rebalance
Rebalancing is something we've talked about a lot over the years for one simple reason.
The theory is very straightforward and very powerful.
Rebalancing forces you to capture profits and buy whatever is on sale. Over time, this significantly boosts your returns and reduces your risk.
Here's how it works.
Let's say you have a $100,000 portfolio that's invested using the proprietary 50-40-10 model I advocate in our sister publication, the Money Map Report.
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For purposes of our discussion today, that'd be 50%-40%-10% in stocks, bonds, and speculative investments, respectively. Or, $50,000 in stocks, $40,000 in bonds and another $10,000 in speculative investments.
A year from now, let's suppose that stocks have appreciated 10% and bonds have lost 12% because the Fed got aggressive with rates. Let's also say you hit the big time with your speculative play and that it's up 100%.
That means your $100,000, 50-40-10 portfolio would now be worth $110,000 and the allocation would be more like 50%-31.8%-18.2%.
To get back to your targeted 50-40-10 risk profile, you'd rebalance by selling $9,000 worth of your speculative investments and buying a corresponding $9,000 worth of bonds using the proceeds, assuming you had no new money to invest.
This is where most investors go off the rails.
They don't see a problem with letting their winners "ride." That's fine if you're in a Las Vegas casino and want to leave your money on the table even as you continue to bet you won't lose it. However, that strategy is totally unsuited to today's financial markets.
What most investors fail to realize is that every dollar you earn if you don't rebalance means you're taking on more risk.
Many investors think this isn't a big deal, but they're sadly mistaken.
Rebalancing regularly can add hundreds of thousands of dollars, even millions of dollars, to your bank account over time. What's more, the advantages associated with rebalancing can be 100%, 200%... even 300% or more in market conditions like those we've got right now.
Here's a study from Forbes highlighting the performance of two hypothetical $10,000 portfolios starting in 1985 and ending in 2010. Both use a 60-40 mix of stocks and bonds based on the S&P 500 Index and the Barclays Aggregate Bond Index. The only difference is that the blue portfolio was rebalanced annually while the orange portfolio was never rebalanced.
The rebalanced portfolio was worth just over $97,000 at the end of the study, but the un-rebalanced portfolio was worth only $88,980. In absolute dollars, that's an $8,020 loss, but in percentage terms it's a staggering 81% loss in investment potential.
Many investors I've talked with over the years get sick to their stomach when they realize that the money that should have been in their pockets because they didn't rebalance now belongs to somebody else who did.
Here's the real kicker, though.
Let me show you what can happen when you don't rebalance.
This catches a lot of people by surprise...
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Put very bluntly, not rebalancing periodically is so damaging that it can lead to dramatically worse results over time even if there are other investment decision rules in place.
That's according to my research and that of Michael Kitces, a partner for Pinnacle Advisory Group, a private wealth management firm overseeing more than $1.8 billion of client assets. It's an older study but the principles are immutable, even in today's complicated markets.
I get asked frequently when investors should rebalance.
I'm a huge proponent of keeping things simple. Very few investors have the discipline needed to realign their portfolio monthly or even quarterly. That's why I recommend simply picking a date you're likely to remember, like your birthday or the first day of December, and rebalancing once a year.
Profit-Boosting Move No. 2: Make Sure You're Tax Efficient
Sadly, many investors don't pay a lot of attention to this either.
But they should.
You can dramatically boost your returns by making sure your money is in the right accounts. The government doesn't want to make this easy, but generally speaking there are three primary types:
- Taxable accounts: These include your plain vanilla individual or joint investment account, bank accounts, and money market mutual funds
- Post-Tax accounts: Roth IRAs and 401(k)s fall into this category
- Pre-Tax Accounts: Think of traditional IRAs, 401(k)s, and 403(b)s
Obviously, every investor's financial situation is unique, so there's a little wiggle room here.
That's why there are no firm dividing lines in my chart; it's merely a starting point for discussions with your accountant or tax planning professional.
Profit-Boosting Move No. 3: Buy Something "Interesting"
And, finally, many investors mistakenly believe that investing is about safety when it's really all about performance. The volatility everybody fears is really nothing more than a travelling companion.
The important thought here is that you can harness volatility in the name of bigger profits once you start thinking about it this way - just like you harness a favorable earnings report, a new FDA approval, or even a stock market correction that puts great stocks like Apple Inc. (Nasdaq: AAPL), Alphabet Inc. (Nasdaq: GOOGL), and Alibaba Group Holding Ltd. (NYSE: BABA) "on sale."
In fact, buying a "riskier" asset can actually lower your portfolio's overall volatility, still provide huge growth potential, and actually improve your results. Especially if it's tapped into one or more of our six Unstoppable Trends and making "must-have" products the world cannot live without.
Right now I'm particularly focused on Harris Corp. (NYSE: HRS).
It's returned a stunning 84.68% from April 22, 2017, through Nov. 24's close since I recommended it, versus only 23.55% from the S&P 500 over the same time frame.
The company is tapped into two of the six Unstoppable Trends - technology and war, terrorism, and ugliness (defense). And it's still got tremendous profit potential.
Harris recently reported Q1 2018 earnings, and the numbers were terrific.
- GAAP earnings and operating income hit $1.38 per share and $272 million, which means increases of 19% and 11% respectively (versus only 4.2% from the S&P 500, according to FactSet).
- Orders hit a record $2.3 billion, having risen 33%. Not surprisingly, more than $875 million of that came from global customers including, among others, the United States, Singapore, Australia, Morocco, the United Arab Emirates, Ukraine, Kenya, and Iraq.
- Free cash flow jumped by $50 million, and Harris ended the quarter with $388 million in cash on hand that it can use for expansion, research, or other capital expenditures as it sees fit.
- Debt fell by $33 million.
- Harris returned $144 million to shareholders via dividends and stock buybacks while also intimating that it plans another $150 million in repurchases for 2018.
It's also worth noting that the company has received no less than 16 upward EPS revisions in the past 30 days with not a single downward number posted, according to Yahoo Finance.
In closing, I hope I've made my point.
There are three simple actions you can take today to boost your profit potential immediately and for years to come.
Get 'em right and chances are good that you will laugh all the way to the bank. Ignore 'em and chances are you'll be watching someone else laugh all the way to the bank.
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About the Author
Keith is a seasoned market analyst and professional trader with more than 37 years of global experience. He is one of very few experts to correctly see both the dot.bomb crisis and the ongoing financial crisis coming ahead of time - and one of even fewer to help millions of investors around the world successfully navigate them both. Forbes hailed him as a "Market Visionary." He is a regular on FOX Business News and Yahoo! Finance, and his observations have been featured in Bloomberg, The Wall Street Journal, WIRED, and MarketWatch. Keith previously led The Money Map Report, Money Map's flagship newsletter, as Chief Investment Strategist, from 20007 to 2020. Keith holds a BS in management and finance from Skidmore College and an MS in international finance (with a focus on Japanese business science) from Chaminade University. He regularly travels the world in search of investment opportunities others don't yet see or understand.