Use These Seven Tips to Optimize Your Returns

1. Countercyclical Trading

You can optimize your returns by trading securities at the right time. Equities are much more affordable after a stock market crash than before one. When one happens, seize the opportunity and enter the market. By deliberately selling shares when demand is high and securities are overvalued, you also achieve maximum returns. The way hedge funds work is even more countercyclical. They allow the fund manager to also use special methods, such as short selling (the sale of a security that is not owned by the seller, or that the seller has borrowed), to deliberately trade against the market.

2. Choose Products with Low Taxes and Fees

A simple, low-risk strategy for optimizing returns is to select low-tax products. This is because not all profits from securities are taxed. Interest from bonds must be taxed as income, as for dividends from stocks. The actual price gains are tax-exempt, however. Profits from derivatives must be taxed differently, based on the particular configuration of the product. You can also save money and thus indirectly maximize your returns with fees. Read more about low-cost investing.

3. Look for a Large Equity Component

If you want to achieve the largest return possible, you should be sure your portfolio has a large equity component. Equities can provide larger returns than other investments, such as interest products or real estate investments. Both the company's financial development and the general mood of the capital market can drive prices upward. Equity investments are associated with significant risk, however, since the same forces that drive prices up can also cause share prices to fall if investors' expectations are not met.

4. Buy Stock from Small and Mid-Caps

Shares in large companies (known as large-caps) often gain less dramatically than stock from small and mid-cap companies, because often, well-known companies are already past their periods of large growth. The high level of liquidity on the stock exchange also limits price fluctuations. In contrast, some small and medium-sized businesses are still growing rapidly, so the stock exchange may also have larger returns. There are risks associated with this, however. Even large caps can suffer a setback, of course, but statistically speaking, smaller companies declare bankruptcy more often than large ones with large cash reserves. Small and mid-caps are also less frequently traded on the exchange than large caps. This means that price fluctuations in both directions occur more quickly. 

5. Invest in Unlisted Companies

Only a small number of companies are listed on the stock exchange. Private investors can also invest in others through private equity funds. These investments have attractive returns. Often, these are young companies with large capital requirements on the verge of developing. Private equity funds provide money, but also have a strategic impact. Potential returns from private equity are great, but so are the risks. Young and small companies are affected by insolvency more often than established companies. Investors in unlisted companies also need to be able to tolerate periods of low liquidity and longer freezes on their invested capital.

6. Invest in Yield-Enhancement Products

Attractive returns can be expected from derivatives. Barrier reverse convertibles (BRCs) are particularly popular among private investors. In a sideways market, they promise more return in the form of coupon payments. With BRCs, investors focus on one or more underlying assets, often equities. If the underlying does not fall below a predefined value, investors receive their money back, plus the coupon, at the end of the term. Otherwise, the underlying asset is transferred to their safekeeping accounts. As with all structured products, however, barrier reverse convertibles are associated with significant risk. If the underlying performs differently than expected, then you suddenly have a low-rated equity in your portfolio. At any rate, the attractive coupon is still paid out. If the bank that placed the product on the market goes bankrupt, however, all the money is lost.

7. Overestimating Yourself

If you want to achieve higher returns by actively seizing market opportunities, you need to invest a great deal of time. You will only truly benefit if you are up to date on market developments and if you spot a trend early on. Anyone who is too late to pick up on the trend is instead buying overpriced securities and cannot achieve maximum returns. However, it is often difficult for a private investor to see which trends are actually promising and which ones are just based on hot air. The risk of a miscalculation is high. Frequently buying and selling equities can also be pricey, since fees are charged each time.