Whether it’s reducing fees, maximizing your tax breaks, or cleaning up your portfolio, here are 10 easy ways to improve your investment performance. None require an expert or a lot of time or effort.
1 Make maximum use of tax wrappers
Move all investments held in taxable trading accounts to your individual savings account (Isa) to protect future growth from capital gains tax (CGT). Some investment platforms allow you to do this through a “Bed and Isa” facility. It’s a great way to use your Isa allowance.
If you are married, consider also using your spouse’s £20,000 annual Isa allowance.
The potential savings are worth it: for example, over 20 years, with an average annual growth of 6%, £20,000 could grow to £64,000. The annual capital gains allowance is £12,300 and beyond that a higher rate taxpayer pays 20% gains tax. The potential saving is £6,340.
2 Reduce your platform fees
After 20 to 40 years of investment, savings from even small annual fee differences could add up to the cost of an annual vacation, a new car or a home extension.
Your investment platform fee is either a percentage of your invested money or a fixed amount in pounds and pence.
If you have a small portfolio of up to around £30,000, a percentage-based fee might work out cheaper, while larger portfolios over £50,000 get better value from fixed fees.
The potential savings are worth investigating. For an Isa investment of £85,000, the difference in annual costs can be £600, according to Boringmoney.co.uk’s comparison tool.
If you spread the £85,000 Isa across 15 funds, making six trades a year, with average annual returns of 6%, the comparefundplatforms.com tool shows that the difference in fees over 30 years can be £72,000.
3 Reduce fund fees
Although you cannot guarantee that the funds you have chosen will be crackers, you can control what you pay for them.
Look for the Ongoing Charges Figure (OCF). If you put £1,000 into a fund with an OCF of 0.5%, you’ve already lost £5 on costs before you’ve had a chance to see your money grow.
Passive funds that aim to replicate the performance of a stock index, such as the S&P 500 or the FTSE 100, mostly have OCFs below 0.5% and costs have come down.
Actively managed funds, where professionals choose how to allocate the money, cost more, with most having OCFs of 0.5% to 1.5%. If you’re using active funds, try to keep OCFs below 1%, unless you’re absolutely convinced the manager is worth paying the extra.
Take an investment portfolio of £100,000 invested over 20 years with an annual return of 6%. With an OCF of 1%, you will pay £55,386 in fees. If you reduce your fee to 0.5%, the cumulative cost is reduced to £28,941, according to the Fund Fee Impact Calculator on Candidmoney.com. The potential savings in this example is £26,445.
4 Go passive for the core of your portfolio
The central and satellite structure is a clever way to reduce costs while making it easier to monitor your investments. You place your main investment in low cost “core” investments (think trailing funds) and a small portion, say 10-30%, is split into higher risk active “satellite” managers and maybe a few stock picks. For the core, many investors choose a low-cost, highly diversified multi-asset tracking fund, such as the Vanguard Lifestrategy 80% Equity Fund with an OCF of 0.22%.
On a £100,000 portfolio and using the same calculator as above, switching to an OCF of 0.22% would result in a fee of £13,051. The potential savings on a 1% OCF is £42,335.
5 Check the overlap of your holdings
Your collective investments may not be as well diversified as you think if the funds you have chosen have similar superior holdings. You can check for overlaps using fund fact sheets or a portfolio x-ray tool to show you where you are overexposed. Your rig may have an x-ray tool, or you can use the one from Morningstar.co.uk.
Potential reward: you remove hidden risks and biases in your investments.
6 Ditch the small farms
It’s common for investors to have a hodgepodge of investments that were great ideas at the time, but without a master plan behind them. You may also fall foul of what legendary American fund manager Peter Lynch called “diworsification.” Essentially, too much diversification can be a bad thing.
Evidence shows that 20-30 investments is the optimal amount to spread the risk. If you have more, you might as well buy an index fund that will give you a similar result at a lower cost.
Any funds or stocks that make up 1% or less of your portfolio probably won’t do much, so eliminate them.
Potential Reward: Save time in ongoing investment tracking.
7 Add a diversifier
Some UK investors only hold funds that invest on the London Stock Exchange. There’s a bigger world out there, so look into adding a global or US equity fund.
You can also spread your risk by buying assets that behave differently than stocks, which means that if the stock market goes down, your portfolio might hold up better. Consider global bonds, UK gilts and gold, as well as some commercial properties, commodities and private equity.
Potential reward: Access broader opportunities and reduce volatility in your portfolio value over time.
8 Add an investment trust
Investment trusts have characteristics that can help them outperform, such as a closed structure that means they can take a long-term view without having to sell shares to meet redemptions. Their borrowing power offers the potential to enhance returns, but also means they can be considerably more volatile.
Studies have shown that, on average, investment trusts have outperformed long-term funds. But the investment trust industry has its winners and losers, so choose carefully.
Potential reward: greater long-term growth.
9 Add A Dividend Hero
Some 17 investment trusts have increased their payouts to investors for more than 20 consecutive years, earning them “dividend hero” status. The City of London Investment Trust, Bankers Investment Trust and Alliance Trust are all celebrating 55 years.
Potential reward: Regular passive income from the stock market.
10 Take a little more risk
Are you holding too much cash or too few stocks? A study by Interactive Investor found that 22% of 18-34 year olds have a low-risk investment plan, which could hurt their chances of long-term growth at a time when they can afford more risk.
Potential reward: greater long-term growth.
Moira O’Neill is Head of Personal Finance, Interactive Investor