Many investors find it to be a rewarding experience, delivering a positive return on their capital.
But equally, especially in the early years, many find those returns to be lower than they had anticipated.
Their capital is growing but by not quite as much as they had expected. They’re seeing an income but again, it’s not quite as much as they had hoped for.
And nor is it generally because they’ve been naïve or unrealistic about those expectations. It’s just that they’d not unreasonably hoped for a little more, and can’t quite see why they’re not getting it.
Taking action
If that’s you, well, you’re not alone. As I say, it’s an experience that is common to many investors.
But what to do about it? That’s trickier.
Not least because taking corrective action means first identifying why, and where, those lower-than-expected returns are being experienced.
And these reasons, of course, can vary from investor to investor.
So here, in no particular order, are three broad strategies for boosting returns, revolving around several commonly encountered reasons for why investors’ returns may underwhelm.
1. Cut your costs
One reason why returns may lag expectations is that investors are incurring levels of cost that are too high. And clearly, the higher your costs, the less there will be available to reinvest or take as income.
So far, so obvious. But why exactly are costs high? That’s trickier to pin down.
You might be using an expensive broker or platform, for example. Or you might be investing in expensive investment funds. And while many investment trusts charge modestly, not all do. It’s perfectly possible that you might be buying into the odd higher-charging investment trust, as well.
Worse, these problems compound. You hold expensive funds and investment trusts with an expensive broker or platform? Ouch.
That said, not all costs come in the form of management charges. Over-trading – or churning – quickly racks up costs in the form of commissions and stamp duty. A practice of long-term buying and holding may be boring, but there’s nothing quite like it for clamping down on trading costs.
2. Take full advantage of tax shelters
As with costs, another reason why investment returns may lag expectations is that investors are investing outside of tax-advantaged accounts.
And money that you’ve paid in tax can’t subsequently be reinvested, or taken as income.
What to do? Simple.
Take advantage of your annual ISA allowance, for one thing. And make use of tax-advantaged Self-Invested Personal Pensions (SIPPs), for another.
Returns in a SIPP, as with an ISA, are free of tax, and SIPP contributions, under existing legislation, get tax relief at an individual’s highest marginal rate of tax.
Better still, ISA and SIPP allowances are fairly generous: under present legislation, investors can shelter up to £20,000 in an ISA each year. The standard rule is that you’ll get tax relief on pension contributions of up to 100% of your earnings or a £40,000 annual allowance, whichever is lower.
For most investors, that’s ample. And given the benefits of investing inside a tax-sheltered investing account, few investors should want to invest outside such an account.
3. Match your strategy to your goals
Finally, another reason why investment returns may underwhelm is that the wrong strategy is being pursued.
An investor looking for income, for instance, may have their capital tied up in investment funds or shares that are targeting growth, rather than income.
Or they may be looking for capital growth but have too much money tied up in shares or funds that are delivering an income.
It’s easy to ridicule such a mismatch, but such conflicts are surprisingly easy to fall into. A few opportunistic Sunday newspaper tips, a smattering of index trackers. It doesn’t require much capital to be misallocated in this way before returns are affected.
The bottom line
Can you see your own habits in any of the above? If your investment returns are disappointing, then I wouldn’t be surprised.
So, take a close look at costs, move investments into ISAs and SIPPs, and make sure that your investment strategy matches your goals.
Better still, start today.
