The evolution of investing
Being adaptive is prudent, but it is not wise to chase the numerous trends that blaze and fade or to gamble with your future. It is sensible to apply the old adage, “if something sounds too good to be true, it probably is” when it comes to investing.
Many of the fundamentals of investing smartly have not changed over the past several decades, however, one advancement has benefited millions of investors: the rise of passive investing, which includes index funds and ETFs.
When Vanguard founder John Bogle introduced the first index fund at the end of 1975 it heralded a new era for those who believed in the potential of the stock market but who were not convinced they could pick the right stocks at the right time. Even the world’s best-known investor Warren Buffett said about passive investing: “I think it’s the thing that makes the most sense practically all of the time.”
Of course, the other great advancement is the evolution of technology, which gives more and more investors unparalleled transparency, freedom and control.
Why you should control what you can
Nothing is guaranteed when investing, but your chances of success are greatly increased if you ‘control the controllables’. While various factors lie outside of your control when you invest – such as market performance, inflation and your life expectancy – you can influence other factors. It is worth spending time on these to help you invest more effectively for the long term.
So, what can you control?
Your fees – to boost growth potential
Paying more than you should in fees is one of the easiest traps to fall into – because as a proportion of an overall investment portfolio, these charges seem negligible. Clients also sometimes think that paying more in fees can lead to better returns. Yet you should always be vigilant. And while you can’t avoid paying fees to manage your money, 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 1.65% vs 0.65% per annum, assuming an annual gross investment return of 5%). Full details of our fees and our fee saving calculator can be found here.
Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.
Your time in the market – to avoid missing out
To act on news or react to events after the market has adjusted is a natural instinct, and because many investors (like most people) are prone to overconfidence and other biases, it’s easy to believe that you can make decisions that benefit from a timely intervention. But this kind of thinking is typically a mistake.
You may have heard the often-repeated wisdom of spending time invested in the market and not trying to time the market. Here is a good example of why. From 31 December 1986 to 30 November 2020 the S&P 500 produced total returns in dollars of 3,074%. But if you missed the top 10 trading days over this period you would only be up 1,318%. Many of these top 10 days (including two in 2020 alone) occurred when investor sentiment was negative, therefore, trying to time when to be in or out of the markets is very difficult and can be extremely costly.
Markets can be volatile, but generally climb the wall of worry and trend up over time
S&P 500 Daily returns since 31st December 1986 to 30th November 2020. Source: Bloomberg, Netwealth
Please note that past performance is not indicative of future performance.
Your portfolio diversification – because asset performance varies each year
Why can’t you just hold the best tech stocks? Or focus on a fast-growing emerging market? Or stick with gold after it has been on a good run? Because from year to year different assets deliver different levels of returns – but it’s almost impossible to predict in advance 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 and continuously monitor their own portfolios cost-effectively, or to find the time to do so – which is why so many look to firms like Netwealth to effectively diversify their money at the right cost.
It is hard to know which asset class will be the top performer in any given year…
… but some relationships do hold
Source: Netwealth, Bloomberg. Market returns in GBP, some assets reflect currency hedging.
Please remember when investing your capital is at risk
Your use of tax wrappers – to make your money work even harder
Tax wrappers are designed by the government to encourage people to invest, and they are often underused – but you shouldn’t neglect their value. 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 – paying 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.)
£58,000 invested in Risk Level 7 each year through a GIA subject to 40% Income tax and 20% on Capital Gains compared to investing that money in ISAs for you and your family.
Source: Netwealth
Simulated historic and future performance numbers should not be relied upon as an indicator of future performance.
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, investing and staying invested, being diversified, and using 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 and dramatically increases your chances of investment success.
Please note, the value of your investments can go down as well as up.
