Control these 4 Factors to Greatly Influence your Investment Returns
13 November 2019 by Matt Conradi
Various factors will typically be out of your control when you invest – such as market performance and volatility, inflation and your life expectancy – but focusing on four key things you can influence is a smart way of thinking about investing for the long term.
You can’t avoid paying fees to manage your money but these charges are controllable. Over 10 years, for example, you could be over £15,000 better off for every £100,000 invested if you saved 1% in fees by using a more competitive wealth manager like Netwealth (comparing all-in fees of 1.8% vs 0.8% per annum, assuming an annual gross investment return of 6%). Full details of our fees can be found here.
Spend time in the market
You may have heard the often-repeated wisdom of spending time invested in the market and not trying to time the market. According to an annual survey of investor behaviour by Dalbar Associates, in the 20 years to the end of 2018 the US stock market’s average return has been 10% per year. But equity fund investors have earned only 4.1% per year1. Therefore, trying to time when to be in or out of the markets is very difficult and can be extremely costly.
Be suitably diversified
From year to year different assets deliver different levels of returns – but it’s almost impossible to predict which assets will perform well and when. A diversified portfolio reduces extremes and smooths the path of returns. Individuals may find it difficult to construct their own portfolios cost-effectively, or to find the time to do so – which is why so many are looking to firms like Netwealth to effectively diversify their money at the right cost.
Make use of tax wrappers
Putting your savings in a tax-free wrapper such as an ISA can greatly improve your net returns. For example, £100,000 invested for 10 years could be worth £127,000 when subject to the higher rate of income and capital gains tax. Yet if this money is invested in an ISA – with no tax – it could be worth £153,000, nearly double the total return on investment. (Assumes long-term median expected returns investing in a Netwealth Risk Level 6 portfolio, with tax marginal rates of 40% on income and 20% on capital gains. Source: Netwealth.)
The factors you can’t control should be frequently assessed and modelled (which you can do here) so action can be taken where necessary. Yet the four factors listed above – fees, staying invested, being diversified, tax wrappers – are very much within your control and can have a huge impact on investor outcomes. To focus on these is time well spent.
Please remember that when investing your capital is at risk. Simulated future performance numbers should not be relied upon as an indicator of future performance.