Following last’s weeks blog post, we’ll be sharing our final five foundation stones to complete the solid base to any investment programme, ultimately helping you to grow your money to enable you to reach your final goal.
Foundation stone 6: Build a well-structured portfolio
Once you accept that returns come from markets and are rarely enhanced by the judgemental approaches of professional managers of market timing and stock picking, it is evident that structuring a well-thought-out mix of different investments (referred to as asset classes) should sit at the heart of your investment programme.
Your long-term portfolio structure will dominate the investment returns obtained during your investment lifetime.
Foundation stone 7: Use diversification to manage an uncertain future
Not putting all your eggs in one basket is an intuitive and valuable concept. No-one knows what the future holds and owning a highly diversified portfolio is the key tool that we have to make sure that we are prepared for whatever the markets throw at us over time.
It brings its own challenges. Inevitably there will always be one or two parts of the portfolio that are doing well, but one or two that are not.
The patient and disciplined investor knows that there is little point in knee-jerk responses and that this is simply the way that markets are. The impatient and ill-disciplined will seek to change their strategy. More fool them.
Foundation stone 8: Avoid cost leakage from your portfolio
Costs eat away at the market returns that you should be gathering for yourself. Small differences in costs will compound into large differences over extended periods of time.
Investment industry costs are high, particularly those related to judgemental (active) managers. If one takes two portfolios with the same gross (pre-cost) returns – one with a low cost of 0.25% a year and the other with a high cost of 1.5% a year – the low cost strategy will, on average, end up with a staggering 65% more money in the pot over 40 years.
Foundation stone 9: Control your emotions by adopting a systematic approach
Unfortunately, evolution has hard-wired the human brain to be particularly poor at making investment decisions.
Evidence of wealth destroying, emotion-driven decision making is plentiful, as impatient and ill-disciplined investors have the propensity to chase fund managers, and markets that have previously performed well, and sell poorly performing investments.
Buy-high, sell-low is not a good investment strategy. Research4reveals that this bad behaviour may cost investors around 2.5% per annum, on average.
Given that equities have only returned around 5% above inflation, on average, that is a material erosion of potential wealth.
Foundation stone 10: Manage risks carefully across time
Our approach to investing positions us as risk managers, rather than performance managers as advisers have traditionally been. Keeping the risk in your portfolio at an appropriate level is achieved through ‘rebalancing’ periodically back to your long-term portfolio strategy.
Rebalancing involves selling out of better-performing assets and buying less well-performing assets i.e. selling, rather than buying ‘hot’ performing asset classes.
Fund selection and due diligence and the ongoing governance of the investment process are all important risk management functions
Employing a systematic investment approach – like the one we have developed – provides the discipline and objectivity that is required to avoid the pitfalls that all investors inevitably face. These foundation stones certainly make investing far simpler and easier, but never easy.
If you’d like to discuss your investments and how you can make them work harder for you, please get in touch to arrange a meeting with one of our advisers.