The big influences on your investment returns Featured
When it comes to investment returns, the list of influencing factors is vast and varied. From economic conditions to market sentiment and interest rates, numerous external forces play a role. However, there are also factors within your control that can significantly shape your investment outcomes. We find that focusing on controllable elements, coupled with strategic guidance, can empower investors to navigate these complexities more effectively.
1. Investor behaviour
Surprised to see this at the top? Research consistently shows us that investor behaviour is often the single biggest factor that impacts returns. It seems that the human brain is almost hard-wired to make significant investment mistakes based on emotion! These are predominately fear and greed. Being fearful when markets are falling and selling out, or buying into markets that have been sharply rising - buying high and selling low.
Having a clear investment strategy and, most importantly, sticking to it during periods of volatility can prevent costly mistakes. Investment success is not about timing the market; instead, it’s about time in the market with a disciplined approach.
2. Time
Time is a powerful ally for investors. The earlier you start investing, the more you can leverage the magic of compounding — earning returns on returns. With compounding, even modest returns can grow significantly over a long period. This is why we usually recommend a medium to long-term investment horizon, allowing time for the market’s natural ups and downs to smooth out and letting compound interest get to work on your behalf.
3. Asset allocation
Asset allocation—how you divide investments across different asset classes (like stocks, bonds, property or cash)—has a considerable impact on returns. Your allocation determines the risk and growth potential of your portfolio, as well as its resilience to market fluctuations. For example, a conservative portfolio with more bonds and less stock exposure may be less volatile, but it might also limit growth potential during bull markets.
A well-diversified portfolio balances different types of assets, aligning with your goals, risk tolerance, and investment horizon. Studies show that asset allocation is a primary driver of returns, even more so than individual stock selection. As advisers, we dedicate a lot of time to ensuring our clients have the right mix of assets to help them meet their financial goals.
4. Stock selection
The impact of individual stock selection on overall portfolio performance is often smaller than you might expect. Outperformance can be difficult to achieve consistently, and past performance does not guarantee future results. What matters more is selecting investments with a clear philosophy and strategy that aligns with your objectives.
Sometimes passive funds are the optimal choice. When actively managed funds are right for an investor, our focus is on choosing funds or managers with a robust, well-defined investment process rather than chasing recent high performers. Selecting quality stocks or funds is an essential component of a portfolio, but it’s just one piece of a broader strategy that includes diversification and a commitment to your long-term plan.
5. Investment costs
Costs and taxes may seem like administrative details, but they can significantly erode returns over time. Management fees, transaction costs, and expense ratios are all fees associated with investing, and keeping these under control can boost your returns. We can help you choose investments that are cost-effective without sacrificing quality.
Tax efficiency is another factor to consider. In Ireland there are different tax rates for life assurance funds and for CGT portfolios. Different scenarios prompt different strategies. By strategically managing costs and taxes, investors can retain a larger portion of their returns.
6. Economic and market conditions
Of course, it would be remiss not to mention the broader economic environment, which influences the performance of all investments. Economic growth, interest rates, inflation, and global events can drive market performance and impact returns. While these external factors are largely beyond an investor's control, they underscore the importance of maintaining a balanced portfolio.
With our guidance, by understanding the potential impacts of economic cycles on various asset classes, this can inform adjustments in your investment strategy.
7. Diversification
Diversification is a classic investment principle: don't put all your eggs in one basket. By spreading investments across various asset classes, sectors, and even geographies, you reduce the risk of significant losses from a downturn in a particular market or sector.
A diversified portfolio helps balance risk and reward, ensuring that your investment journey remains smoother, even if specific markets experience turbulence. A well-diversified portfolio might not always deliver the highest possible returns, but it tends to offer more stability, aligning with the long-term approach that benefits most investors.
Investment returns are shaped by numerous factors, some beyond our control and others well within it. By focusing on controllable aspects—like sticking to the plan, starting early, choosing the right mix of assets, managing costs, and keeping a long-term perspective—investors can position themselves to achieve favourable returns.
We can help you understand these factors and implement a tailored investment strategy. Remember, investing is a marathon, not a sprint.