Improving the returns one receives from ASX shares might appear like a daunting task. Where should an investor even start when aiming to increase how hard their money works for them?
Well, I believe upping my potential returns doesn't have to be difficult – or impact my entire portfolio.
Upped my returns by investing in ASX value shares
Let's assume I held a portfolio capable of providing a modest 5% return annually, including dividends and share price gains.
As per the rule of risk and reward, we can probably assume that's a relatively safe portfolio, perhaps made up of mainly blue-chip shares.
But what if there was a way to increase my returns by 20% each year without relinquishing my safety net? That's exactly what a shadow portfolio of ASX value shares could offer.
The market's 2022 tumble has likely left many ASX shares trading below their intrinsic value, thereby creating plenty of value investing opportunities.
Many of which might be capable of returning 10% – including share price increases and dividends – over the coming years.
How I'd increase my annual returns by 20%
Let's say I identified a diverse handful of ASX value shares I believe could provide an average annual yield of 10%. What next?
Well, if I were aiming to increase my total returns by 20% each year, I would aim to invest around 20% of the value of my current portfolio in a secondary, satellite portfolio.
At which point, I would anticipate my investments' performance could look like this:
| Portion of my portfolio | Expected annual return |
| 80% | 5% |
| 20% | 10% |
| 100% | 6% |
As the above chart shows, by building a portfolio of ASX value shares around a fifth of the size of my current figurative holdings, I could boost my annual returns to 6% – a 20% increase.
Though no investment, no matter how well thought out, is guaranteed to provide returns and past performance is not an indication of future performance.
Diversifying to reduce risk
In another way, however, I believe adding some ASX value shares to an otherwise mainly blue chip portfolio could reduce risks anyway.
That's because a diverse portfolio can generally better weather the market's downturns and make better use of its good times.
Still, on an individual level, value stocks are often riskier than blue-chip shares. Thus, the makeup of an investor's portfolio should consider their tolerance for risk and volatility.
