If you’re keen to maximise the returns on your investments (hello, everyone!), it pays to know the factors that can make a difference – and that’s whether you look after them yourself or someone else does it for you. Financial planner ANDREW TALBOT highlights some of the main ones.
Step one in anything to do with money is to ask why. Why are you making this investment? What’s the reason for it? It could be for retirement, to change careers, to send your children to university. How you accomplish this is the next step. Do you use a property to do this, or an investment account? Step three is the detail to make this work – where the property is located, for example, or where you’ve invested the money.
The market will determine the expected return of the investment, unless you can influence this. For you to make a difference as the investor, there are three main factors that can be controlled. Other factors will have an influence, but not as big as these three. Although simple in concept, they aren’t easy to put into practice, and day-to-day factors can also affect the outcome.
#1 Cost of investment
The cost per year of your investment will dictate your return. The higher the cost, the higher the return you need to get over the hurdle. If you can reduce your costs – of the advice, the platform and the fund management – then the hurdle required will decrease before you make your expected return. The cost of a fund manager can vary hugely, and the investor has to take the opinion that this manager is adding sufficient value for the cost.
The platform, insurance policy or investment vehicle that you use will also have a cost, as will finding the most efficient way to fund your goals (which is the reason you’re doing this in the first place).
#2 Asset allocation
Given enough time, investing in the great companies of the world will generally produce a better return than investing in fixed income or cash. This is why pension funds and investment companies hold these equities. Generally, the average investor has too much cash and is not invested. Once you’ve identified and planned your goals, taking account the need to have emergency money and other contingencies, you should be investing your cash; and, the longer you don’t need to spend it, the more it should be invested in equities.
#3 Human behaviour
When the equity markets start dropping, do you get a tinge of fear? Do you feel envious when you hear that other people’s investments are beating yours? The human behaviour of investors will have a huge impact on their return. Once a financial plan is in place, the investor needs to stick to it to fulfil its objectives. Making bad decisions will affect the plan. There are plenty of sayings over the years to re-enforce these actions; as one old one goes, “Time in the market rather than timing.”
Investing is more than a mathematical analysis of risk and return, as we’ve discussed above. It’s a struggle with ourselves: to tune out irrelevant information, to have the strength to stick to the plan, and to resist the urge to follow the herd (except, of course, when it knows better than we do). Facing this internal struggle, investors are often told to avoid the emotional roller coaster and magically remove temptation from the picture.
An interesting investment quiz…
A good illustration of all this is in the following investment questions posed by Vanguard. Which of these should investors do?
- Buy low, sell high (i.e., make a profit)
- Buy high, sell low (i.e., put your money in a big pile and burn it)
Got your answer to that one? Great, now let’s try another one. Please imagine you see a story that’s all over the news. It’s about a hot company with an amazing hit product, like the next Apple or Tesla. Should investors:
- Check out the company and potentially invest
- Ignore the news and invest as before
We all know that “1” is the right answer to the first question. But we’re likely to be conflicted about the second question. You know it’s a trick, and that “2” is probably the right answer. But “1″ feels natural because words like “all over”, “hot” and “hit” are all positive, and they tell us that lots of other people like the company. We’re naturally drawn to things that other people like and find valuable; behavioural scientists call this “social proof”.
Unfortunately, investing isn’t natural. If other people like an investment, the price goes up. If the price goes up, all things being equal, you’re buying high – which is like putting money in a big pile and burning it. Yes, there are many nuances here, like the fact that other people might drive the price up even more after you buy it (also known as the “greater fool” theory). But putting aside the nuances and our natural temptation to try and outsmart everyone else in the world is one small part of the crazy logic of investing.
Which comes back to your own plan – a plan that is only for you, and which isn’t about what the markets are doing. Control what you can control and ignore the financial “pornography” of the news!
Find out more!
Andrew hosts workshops on this topics too. To learn more about understanding the myths of investing and how to supercharge your returns, watch this now.
Written in collaboration with Expat Financial Planning:
2 Battery Road, #26-01, Maybank Tower
9824 1470 | 6632 8537 | expatfinancialplanning.com | avriowealth.com
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