How Just Four Factors — That You Can Control — Greatly Influence Your Investment Returns
03 October 2018 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. From December 31st 1986 to September 25th 2017 the S&P 500 produced total returns in dollars of 933%. But if you missed the top 10 trading days over this period you would only be up 399%.1 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.
This article is an abridged version of a more detailed piece which you can read here.
Please remember that when investing your capital is at risk.
1 Source: Bloomberg, Netwealth. Cumulative total returns and daily returns of the S&P 500 since 31st December 1986 until 25th September 2017.