I believe investing a small portion of my portfolio in high-yielding ASX income shares could up my annual returns by a quarter. My secret ingredient? Diversification.
Why I would diversify to bolster returns
Say I held a portfolio of shares capable of offering a stable 5% return annually. Such a return – considering both capital gains and dividends – is relatively modest. Though, it's likely also comparatively safe.
But what if I told you there might be a way I could have my cake and eat it too? That is, investing a small portion of my portfolio in high-yielding ASX shares.
Plenty of quality ASX dividend shares are likely trading for a discount following 2022's market downturn.
Many of those could be capable of returning more than 10%, including both share price gains and dividends, at their current prices.
How I might boost my ASX portfolio's annual return by 25%
Now, I wouldn't want to give up my core portfolio in a bid to realise higher returns. What I might do, however, is create a smaller high-yield ASX portfolio to sit alongside it.
I might aim to build up my high-yield portfolio to a quarter of the size of my core portfolio, taking care to only add shares I believe can outperform the market over the long term.
If I could find a handful of shares capable of providing an average 10% annual return, my portfolio's predicted performance might look like this:
| Portion of my portfolio | Expected annual return |
| 75% | 5% |
| 25% | 10% |
| 100% | 6.25% |
Thus, I could bump my total projected annual return from 5% to 6.25% – increasing it by 25% – by investing in a shadow portfolio of high-yielding ASX shares.
Though, it's worth noting no investment is guaranteed to provide returns and past performance isn't an indication of future performance.
Risk vs reward
You might be reading this and wondering why I wouldn't just build my entire portfolio from shares I believe could return more than 10% annually.
My reasoning is simple: Higher rewards generally come with higher risks.
Rarely will a blue chip share return 10% in a single year. However, that sort of return is often common among growth stocks.
Thus, diversification can help an investor make the most of various investing enclaves, while still offering some protection from market swings.
Additionally, an investor's tolerance for risk and volatility should largely determine the makeup of their ASX portfolio. Personally, I'd be comfortable with a 75%-stable and 25%-high-yield mix, and the diversification such a make up can offer.
