Ways to Improve Your Investment Performance

Probably the best way to make a significant return over time is to invest in the stock market. In the UK an investment of £10,000 in 1977 would be worth £62,680 (at Bank of England Base Rate) via regular cash savings accounts but £621,411 had that money been invested in stocks and shares. Clearly something so attractive is also very risky. For me to retire at 45 I have had to take the risky route, though I confess I am far from an expert. As such I am not investing in individual stocks but funds (Mutual Funds in the USA?).

These allow me to pick where my cash is invested, but then allow a professional fund manager to manage that particular portfolio. For example, given the increasingly westernised diet of China, India and other developing nations and the relatively poor yields due to adverse weather, I realised the potential for massive growth in the agriculture business. As such I invested in Sarasin Agrisar Fund. Whilst currently taking a dip it did yield some results before the latest economic downturn, it’s a specialist investment and I am in it for the long term but I see great potential in it.

Given the current economic situation it is probably quite easy to understand why people panic and start to move their investments around, this could actually be doing you more harm than good. Have you ever thought that if your investments are in managed funds that this economic downturn could actually benefit you?  Here are some tips to improve your investment performance.

Automatic Contribution

The obvious point from this is that you should be saving a regular amount each month as its a quick and easy way to build wealth. However, there is an added bonuses to contributing regularly with an investment:

• Spreading risk. Instead of investing £10,000 (or $) in one single lump why not invest it over 10 months at £1000 a month? This will help lower the risk to the volatility of fund prices.
• Bagging a bargain. I may be wrong, as I stated I am not an expert however at least here in the UK I see no way that a particular fund I am invested in goes belly up. All are significantly widely invested to weather the storm, plus there is an expert managing them. The major plus in this storm however is that my £320 a month didn’t buy me half as many fund units as it does now and with my brokers reckoning that when the markets do return and they level out that my potential gain could be as much as 30%, I think I maybe quids in!

Automatic Reinvestment

Works simply on the principles of compound interest. Currently my broker has been instructed to automatically reinvest any dividend pay outs back into my investments which should make my final payout more fruitful. 

Asset Allocation

It is important to take stock (No pun intended) of your portfolio at least once a year. The traditional advice is to look at your exposure to various markets, decide on what your optimal portfolio is, based on the risk your willing to take and the markets performance and allocate accordingly. Sounds easy right? 

Well actually if your playing with funds like me it can actually be quite hard. Looking at the breakdown of these funds on a 3 monthly basis I was noticing that the fund managers were varying the geographical diversification of my investments quite heavily. For example my Neptune Russia and Greater Russia Fund whilst on the surface would indicate investments in Russia has actually only 78.37% invested there at the time of writing. My advice is to therefore not look at the funds on a macro level but the bigger picture of their fund type, UK Equities, Specialist etc and allocate in that manner. In the current situation I would also advise on looking at your portfolio maybe every 3 months with changes (If needed) every 6-12months.

Lower Your Expenses

Actually my last point covers this one pretty much fully. Many people panic when they see a fund or stock price drop, why are these people investing if they can’t take a loss? Don’t move things around to much it costs you money! The stock market always has and always will be a long term investment. Buy low and sell high is possible but not a game you should be playing with anything but a small amount of play money. For investing in your future you should be looking at investing for 5-10 years minimum. Other tips to lowering your costs:

• Scrutinize annual charges. Currently, on my self invested pension plan (SIPP) I am paying 0% on cash and 0.5% on all investments + VAT up to a maximum of £200 + VAT per annum. 
• Fund dealing costs. This is free for me and a major bonus which also makes moving my portfolio around easy and attractive to do.
• Fund initial charges. These can be a bit of a sting so look out for them. 
• Fund annual charges. This is separate to my broker and is charged by the fund themselves. It’s the fee to the managers for, well, managing! I tend to think that cheaper is not always best here.
• You can also seek to choose passively managed funds over actively managed ones to save a pound or dollar or too.

Tax Savings

Here in the UK there are many ways (Unbelievably) of keeping your cash and investments from the taxman. This section is probably best separated into UK and US parts. 

- UK

• You can invest upto £7,200 in a stocks and shares ISA. This is a tax free wrapper, use it!
• SIPPs provide basic rate tax relief, for example, invest £8,000 and the government will top it up by £2,000 to make your total investment £10,000.
• It gets better, if your a higher rate tax payer you can claim this back via your tax return meaning if you invest £6,000 your investment will turn into £10,000.

In summary, if your close to retirement (5 years or under) you may well want to think about moving your investment around or pulling it out into cash depending on how much you have already lost. If your over 5 years to retirement hold still and ride it out, my predication is that things should start to correct themselves in the early half of 2009.

Do any of you have any other ways to improve investment performance both in bad times and in good? Or have I got any information wrong in my post, i’d love your feedback and comments.

• Countdown Timer

• • Retire at 45:
    in 19 years, 2 months, 0 weeks, 2 days

• Net Worth, Goals and Debt

• Outstanding Debts and How Much is Payed
  
  Total Student Debt: £17,000
  £0