Holding Money

Source: Flickr user Steven Dipolo.

What are your New Year's resolutions for 2016? If you don't know yet, we'd like to see you choose to make 2016 the year your portfolio makes the leap from good to great. We asked five of our contributors to share some suggestions for how you can make it happen, and here's what they had to say.

Dan Caplinger: Many investors have realized that all they need to do to achieve solid investment returns is to set up a core portfolio of mutual funds and exchange-traded funds. Even if you never go beyond owning a fund that tracks the S&P 500 or another popular stock benchmark, you'll still reap the rewards of long-term growth in the stock market.

Yet if you want to take your portfolio to the next level, it can be smart to carve out a small piece of your overall assets and use it to invest in individual stocks. The amount of research and investigation that it takes to identify and learn about individual companies can be much greater than what you'll spend putting together a core portfolio of ETFs and mutual funds. Yet the rewards can also be greater, as the right individual stock can produce returns that will put typical index funds to shame.

As you gain confidence, you can make your own decisions about how much of your total investments you want in individual stocks and how much should remain in your core portfolio of funds. Even if you only put a small amount of your money into stocks, the experience and knowledge of investing in individual companies can be valuable in making you comfortable about your overall investing strategy.

Selena Maranjian: Here's a valuable investing tip: Stop waiting for those loser stocks in your portfolio to gain back what they've lost. It's a common instinct, to be frustrated that we lost money on a given stock and to vow to sell it once it recovers enough so that we can break even. Alternatively, we might just look at a handful of losers, take a deep breath, and keep waiting -- for recovery, for appreciation beyond our entry price ... for anything, really.

That's a poor way to think about your investments, though, and it can be a very costly one. Imagine, for example, that you've lost $1,000 on Company A and no longer have much faith in its future. You do like Company B's prospects -- a lot -- and are waiting to invest in it once Company A's stock recovers. It's fair to want to get your $1,000 back -- but here's the key concept: You don't have to earn that money back from Company A, where it's not even likely to happen. You can earn back the money you lost on Company A by plowing whatever is left into stock in Company B. Earn the money back by investing in companies you do believe in.

At any given time, you should have your money invested only in your best ideas. It might be your 10 or 20 best ideas (not just one or two, lest you have too many eggs in one basket), but having 50 best ideas is less effective. When you accumulate more money to invest -- put it into your best idea or ideas -- not into your 50th-best idea. After all, it has the best chance of growing in your best ideas, doesn't it?

Jason Hall: One of the simplest things you can do to supercharge your portfolio actually means doing less: Buy and hold for the long term.

A number of studies have shown that more investors than not underperform the market and pointed to a number of factors as to why. The biggest one? Trading too much.

The thing is, investing shouldn't be treated like gambling, for a few reasons. The first is the impact of excessive taxes and trading fees, which can sap several percentage points from your returns every year.

Think a few percent in fees doesn't matter? Think again. Here's how much even 1% more in fees can affect your returns over time:

Hall

Based on $2,500 invested each year over 35 years with 8% annualized rate of return.

We're talking about nearly $100,000 less because of a measly 1% more in fees each year, assuming a market-average rate of return of 8%.

Here's the bottom line: Those small fees are almost definitely costing you a lot more than you realize. If you're not getting better-than-average returns and you're trading a lot, then it's time to change strategies to a long-term approach. 

Adam Galas: One of the best tips I can give investors is to start investing in dividend stocks. There are two specific reasons this strategy can supercharge your portfolio's long-term returns.

First, numerous studies have shown that high-yielding dividend growth stocks are, over the long term, the best-performing class of equities. Given that stocks have proved to be the best performing asset class over the past 100-plus years, that literally means dividend stocks are, bar none, the best long-term wealth building strategy you can pursue.

Second, and perhaps most importantly, dividend investing helps to save you from being your own worst financial enemy. By that I mean that most investors end up underperforming the market or even losing money because they lose track of the fact that stocks represent partial ownership in real companies. Thus, many people start thinking of stocks purely as speculative bets, and in an attempt to own the "next big thing" they end up trying to time the market, overtrading, and buying woefully overvalued hype stocks.

Worse yet, when the market invariably corrects, the hyperbolic financial media can stampede such investors into selling, often near the bottom, thus locking in spectacular losses.

Dividends, on the other hand, are the exact opposite of this kind of short-term "get rich quick" mentality. Proper dividend investing teaches one to be patient, and to value companies primarily for their long-term growing income streams.

It teaches one to carefully study a company before investing, to make sure its business model is healthy and capable of supporting both the current dividend and future payout growth. Most valuable of all, during a market collapse, when quality companies can be selling at fire-sale prices, dividend investors avoid panic-selling. Rather, they focus on the mouthwatering yields their favorite dividend growers are now offering and eagerly buy when the opportunity for long-term total returns is greatest.

Matt Frankel: One thing that could take your portfolio to the next level is understanding and applying the concept of the "wide moat" when choosing stocks to buy.

A wide moat is basically a sustainable competitive advantage that makes it difficult for competitors to steal a company's market share and should enable the company to maintain its profitability for the foreseeable future. Examples of advantages that could be considered a wide moat include, but are not limited to:

  • Lack of competition in the industry or high barriers to entry -- for example, apartment REIT AvalonBay develops properties in high-cost markets like New York City that are difficult for smaller competitors to obtain financing for.
  • Pricing power -- Wal-Mart's no-frills stores and its size allow it to undercut the competition and still turn a profit. Coca-Cola's strong brand name allows it to charge more than other soft-drink manufacturers.
  • Superior quality -- some companies produce products that are simply better than all of their competitors. Under Armour is one example that comes to mind.

If you focus on companies that have an identifiable wide moat, it's easier to build a portfolio of stocks that will not only stand the test of time, but also whose competitive advantages will result in superior performance.

Adam Galas has no position in any stocks mentioned. Dan Caplinger has no position in any stocks mentioned. Jason Hall owns shares of Coca-Cola and Under Armour. Matthew Frankel has no position in any stocks mentioned. Selena Maranjian owns shares of Coca-Cola. The Motley Fool owns shares of and recommends Under Armour. The Motley Fool has the following options: long January 2016 $37 calls on Coca-Cola, short January 2016 $43 calls on Coca-Cola, and short January 2016 $37 puts on Coca-Cola. The Motley Fool recommends Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.