In this article, we present to you four key tips you should remember to enhance your portfolio returns. After you read this article you will understand the importance of having a diverse asset allocation strategy to build a portfolio which would give long-term benefits.
The importance of dynamic asset allocation
Any small investor would consider investing in equities or bonds which are the 2 financial options available to invest. Equities possess greater risks and therefore higher yields. On the other side, bonds show relatively low risk & return relationship. In terms of equities, the returns are not same and not fixed. Sometimes the returns can be negative. However, in terms of bonds the returns are fixed therefore giving you a stable income. Therefore, if a person wants to optimize & balance his returns dynamic asset allocation which is having a mix of equity and bond investment assets becomes important.
Know how you are comparing
Investors compare their assets based on their valuation. Valuation is the value of an asset’s yield. In terms of bond it’s called bond yield. The yield from equities is not fixed and it changes on a yearly basis. The future yields will be higher than present as equity earnings tend to grow.
For example, the current PE ratio for Nifty is 15 and the yield is 6.5 to 6.6%. On the other hand, the ten year bond yields 8.9%. Hence, people can compare such yields between bonds and equities to see which benefits. Of course one may not do it daily but over a period of time to understand the differences in yields between equities and bonds. Further you’ll understand the benefits when one understands the differences in yields between equities & bonds.
What’s the benefit of understanding such yield gap ratio?
The benefit is that after you evaluate the yields it becomes easy to decide the time convenient whether to buy equities or bonds.
Equities tend to go through extreme phase of sentiments and are traded at extreme levels. Therefore, equity markets are affected and can degrade or become expensive. Hence, it’s crucial to identify those extreme phases to benefit most from the equities.
If you identify and invest according to the extreme phase of sentiments then over a period of time you will get maximized returns with least loss.
How you should allocate assets in your portfolio? What should you invest in more, equities or bonds?
The yield gap between equities and bonds is declining. Equities tend to be richer than bonds. However, the returns are based on market sentiment and market is extremely volatile today. If there is growth in the market then equities will perform better. However, if growth does not happen then bonds will largely outperform equities. If one thinks in this way then he/she would consider investing more in long bonds and less in equities.
Hence, not you know the four key tips you should remember to enhance your portfolio returns.