Well there is no exhaustive list for this one – there really are so many potential factors that can influence your investment returns. When you ask a professional investor, they will often jump to factors such as the economy, sentiment and interest rates. All very relevant factors.
Some factors of course have bigger impacts than others. So, we’re going to set out below the factors that we see as potentially having the biggest impacts, focusing on the factors that you have some control over –either yourself or more likely with some assistance from us.
This is not an exhaustive list and these factors are not necessarily in order, however we’ll start with the factor that (maybe surprisingly to you) tends to have the biggest impact on investor returns.
Investor Behaviour
Are you surprised by this one? This factor definitely has the single biggest impact on investment performance. How many investors around the world panicked at the end of last year after the S&P 500 index fell 14% in the last quarter of 2018, and moved their portfolios to “safer ground”? Thousands if not millions of investors did – and they all then missed the 11% bounce in the first 2 months of 2019.
We see this all the time… fear in falling markets and people selling as assets get cheaper, and greed in rising markets with investors then piling in and buying expensive assets. The key is to have a clear investment strategy… and to then stick to it.
Time
Time impacts investments in a number of ways. First of all, the earlier you can start investing allows the magic of compounding of investment returns to get to work. The longer you then invest allows this compounding to really deliver over time. This is one of the big reasons why we encourage people to take a medium to long timeframe with their investments. Also markets can be quite volatile over short periods of time, so investments held for longer periods tend to exhibit lower volatility than those held for shorter periods – another advantage of longer term investing.
Finally you will often hear us say that trying to guess the best time to either enter or exit markets is folly – none of us have a crystal ball. The key is to have a structured plan for your investments, and to then stick to the plan.
Asset Allocation
The choices that are made between different asset classes can have a significant impact on your investment – whether you are invested in equities, property, bonds or cash etc. or how much you should have in each of these asset classes. After all, the greatest stock selector in the world will have little impact on your investment returns if only 10% of your money is in equities… Asset allocation is an important driver of investment returns, and is a factor that we spend a lot of time considering when building investment portfolios.
Stock Selection
“Star” fund managers get a lot of media attention, but their impact in reality on the returns of investors is actually relatively small. Yes they can positively impact the return on a portfolio, but this impact is quite a bit lower than most of the other factors that are mentioned. Out-performance in stock selection is also a hard one to anticipate as past performance is not a guide to future performance. Just because one investment house outperformed in recent years is not very meaningful… Understanding an investment manager’s philosophy and strategy is a far better guide than recent performance when choosing a fund manager.
Investment Costs & Tax
There are a number of factors that create a drag on investment returns that must be managed carefully. You should be satisfied that you are minimising the potential tax impact on your investments, and that any charges and expenses applied to your investment are competitive. Costs matter – you must ensure that you are receiving value for these costs. We are always happy to chat though the charges that apply to any investments, and also the different tax strategies that can potentially be deployed.
These are just some of the factors that will impact the returns on your investments, and over which you have some control. We will always look to bring your focus back to the plan – what you are trying to achieve, the investment strategy put in place to get you there and to keep you focused on that. This is the best way to grow your investments and to minimise any negative impacts.