Investment Traps to Avoid in 2019
We usually recognise the wisdom of investing for the future – whether for a specific purpose like a child’s education or our retirement. But it is surprisingly easy to ignore the ‘investment traps’ which can make a considerable difference to the outcome.
Paying too much in fees
We routinely pay close attention to the performance of investments – and the rise and fall of stock markets – but often completely overlook the erosive impact of fees.
Over the long term, high fees can have a hugely detrimental impact on an investment portfolio. For example, on £500,000 worth of investments in a moderate risk portfolio, a saving of just 1% per annum in fees amounts to a portfolio benefit of £75,000 over 10 years. This rises to £240,000 over 20 years.
With 3rd January 2019 marking the deadline for the implementation of MiFID II, wealth managers will be required by the regulator to disclose fees and the associated charges around how their clients’ portfolios are constructed and managed.
It is the perfect time for investors to demand more information from their wealth manager and get a clearer understanding around what they are actually paying for. It will hopefully act as a wake-up call to the many investors who are still unknowingly being overcharged.
Home country bias
It is human nature to favour what we know. This tendency also extends to investing and explains why most people are biased towards investing in their home country.
In an increasingly volatile macro-economic environment, investors should strive to build a globally diversified portfolio as it can be difficult to predict which region will perform better from year to year.
However, with a no-deal Brexit still a possibility, the importance of a globally diversified portfolio is even more critical. Domestically-focused UK equities have already been affected, so they look quite cheap. However, they could suffer further if the political environment remains volatile, so investors should check they are happy with their portfolio’s balance between UK and international exposure, to ensure their portfolio is not damaged too severely if the UK tumbles out of the EU next March.
Trying to time the market
At Netwealth, we invest following the mantra of ‘time in the market, not timing the market’, believing that trying to ‘time the market’ is fraught with difficulties – and usually costly. With market volatility likely to extend into 2019, mistiming a decision to buy or sell could be incredibly costly for investors.
Taking a long-term view and being prepared to ride the highs and lows of the market is key, especially during a period of volatility such as the one we are currently experiencing. Netwealth analysis of Bloomberg data shows that from December 31st 1986 to December 6th 2018 the S&P 500 produced total returns in dollars of 2,143%1. Yet if you missed the top 10 trading days over this period you would only be up 982%. Given these big days tend to take place in volatile periods and it is impossible to predict when they will arrive, those that choose to remain in the market will probably fare much better in the long run.
Please remember that when investing your capital is at risk.
1 Source: Bloomberg, Netwealth. Cumulative total return of the S&P 500 since 31st December 1986 until 6th December 2018.
Paying too much in fees
We routinely pay close attention to the performance of investments – and the rise and fall of stock markets – but often completely overlook the erosive impact of fees.
Over the long term, high fees can have a hugely detrimental impact on an investment portfolio. For example, on £500,000 worth of investments in a moderate risk portfolio, a saving of just 1% per annum in fees amounts to a portfolio benefit of £75,000 over 10 years. This rises to £240,000 over 20 years.
With 3rd January 2019 marking the deadline for the implementation of MiFID II, wealth managers will be required by the regulator to disclose fees and the associated charges around how their clients’ portfolios are constructed and managed.
It is the perfect time for investors to demand more information from their wealth manager and get a clearer understanding around what they are actually paying for. It will hopefully act as a wake-up call to the many investors who are still unknowingly being overcharged.
Home country bias
It is human nature to favour what we know. This tendency also extends to investing and explains why most people are biased towards investing in their home country.
In an increasingly volatile macro-economic environment, investors should strive to build a globally diversified portfolio as it can be difficult to predict which region will perform better from year to year.
However, with a no-deal Brexit still a possibility, the importance of a globally diversified portfolio is even more critical. Domestically-focused UK equities have already been affected, so they look quite cheap. However, they could suffer further if the political environment remains volatile, so investors should check they are happy with their portfolio’s balance between UK and international exposure, to ensure their portfolio is not damaged too severely if the UK tumbles out of the EU next March.
Trying to time the market
At Netwealth, we invest following the mantra of ‘time in the market, not timing the market’, believing that trying to ‘time the market’ is fraught with difficulties – and usually costly. With market volatility likely to extend into 2019, mistiming a decision to buy or sell could be incredibly costly for investors.
Taking a long-term view and being prepared to ride the highs and lows of the market is key, especially during a period of volatility such as the one we are currently experiencing. Netwealth analysis of Bloomberg data shows that from December 31st 1986 to December 6th 2018 the S&P 500 produced total returns in dollars of 2,143%1. Yet if you missed the top 10 trading days over this period you would only be up 982%. Given these big days tend to take place in volatile periods and it is impossible to predict when they will arrive, those that choose to remain in the market will probably fare much better in the long run.
Please remember that when investing your capital is at risk.
1 Source: Bloomberg, Netwealth. Cumulative total return of the S&P 500 since 31st December 1986 until 6th December 2018.
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