06 Nov What You Can Control – Part 2
Last week I outlined the first two key areas investors should focus on when investing – planning (with a goal in mind) and diversification.
This week I’ll highlight the final three; these are areas investors can control, in turn offering themselves the best chance of success.
Asset Allocation: As markets around the world push higher, each individual investor will find their portfolio performing differently, the reason for differing results is asset allocation.
Initially, asset classes are allocated in terms of growth (shares and property) and defensive (cash and fixed interest), those asset classes are then broken into varying classes of local and international shares and property, then local and international fixed interest
Finally, local and international shares are broken into three classes of small, value and large.
Academic studies have shown over 90% of your portfolio’s performance will be determined by your asset allocation mix.
Historically, a tilt towards small and value shares has increased expected return (with higher risk) though more recently large shares have shown better returns.
Costs: Costs will be a drag on any investment plan because every dollar lost to excess management fees or taxes is a dollar less earning for you.
Take $100,000 with a 1.5% management fee; assume an investment timeframe of 30 years with an average return of 6%.
The end result is $369,723, but raise management fee 0.5% and the end result falls to $318,773.
The most common reason for higher fees are the trading expenses of active managers who regularly fail to outperform their benchmark – money for nothing.
Discipline: The impact of emotions and impulses on your investment returns.
Often this comes from trying to time the market or guess what will happen next.
A market drop in mid-2012 had many investors rushing to cash against better advice; from that scare the ASX All Ords has moved up 26% while cash investors suffered two interest rate cuts.
These five areas are basic and while they may seem unexciting against hot share tips, they’re the major contributors to investment returns