Whether it’s cutting fees, maximizing your tax breaks or tidying your portfolio, here are 10 easy ways to improve your investment performance. None requires an expert or much time or effort.
1 Use tax wrappers to the full
Move any investments held in taxable trading accounts to your Individual Savings Account (Isa) to shelter future growth from capital gains tax (CGT). Some investment platforms enable you to do this through a “Bed and Isa” facility. It’s a great way to use your Isa allowance.
If you’re married, think about using your spouse’s annual £20,000 Isa allowance too.
The potential savings are worthwhile: for example, over 20 years, with annual average growth of 6 per cent, £20,000 could grow to £64,000. The annual capital gains allowance is £12,300 and beyond this a higher rate taxpayer pays 20 per cent tax on gains. The potential saving is a chunky £6,340.
2 Reduce your platform fees
Over 20 to 40 years of investing, the savings on even small annual differences in fees could compound up to the cost of an annual holiday, a new car or home extension.
Your investment platform’s fees are either a percentage of your money invested, or a fixed amount in pounds and pence.
If you have a small portfolio of up to about £30,000, a percentage-based charge could work out cheaper, while larger portfolios above £50,000 get better value from flat fees.
The potential savings are worth looking into. For an Isa investment of £85,000, the difference in annual costs can be £600, according to the comparison tool at Boringmoney.co.uk.
If you spread the £85,000 Isa between 15 funds, making six trades a year, with annual average returns of 6 per cent, the comparefundplatforms.com tool shows the difference in charges over 30 years can be £72,000.
3 Cut back on fund fees
While you can’t guarantee your chosen funds 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 per cent then you have 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 market index, such as the S&P 500 or FTSE 100, mostly have OCFs below 0.5 per cent, and costs have been coming down.
Actively managed funds, where professionals choose how to allocate the money, cost more, with most having OCFs of 0.5 per cent to 1.5 per cent. If you’re using active funds, try to get the OCFs below 1 per cent, unless you are absolutely convinced that the manager is worth paying extra for.
Take a £100,000 investment portfolio invested over 20 years with a 6 per cent annual return. With an OCF of 1 per cent you will pay £55,386 in fees. If you cut your fees to 0.5 per cent the accumulated cost reduces to £28,941, according to the fund charges impact calculator at Candidmoney.com. The potential savings in this example are £26,445.
4 Go passive for the core of your portfolio
The core and satellite structure is a neat way to cut costs while making your investments easier to monitor. You put your main investment in low-cost “core” investments (think tracker funds) and a small portion, say 10-30 per cent, is divided into higher risk “satellite” active managers and perhaps some stock picks. For the core, many investors pick a low-cost highly-diversified multi-asset tracker fund, such as the Vanguard Lifestrategy 80 per cent Equity Fund with an OCF of 0.22 per cent.
On a £100,000 portfolio and using the same calculator as above, moving to an OCF of 0.22 per cent would incur charges of £13,051. The potential savings on a 1 per cent OCF are £42,335.
5 Check overlap on your holdings
Your collective investments may not be as well diversified as you think if the funds that you have chosen have similar top holdings. You could check for overlap using the fund fact sheets or a portfolio X-ray tool to show you where you are overexposed. Your platform may have an X-ray tool, or you could use the one at Morningstar.co.uk.
Potential reward: you remove hidden risks and biases in your investments.
6 Ditch smaller holdings
It’s common for investors to have a mishmash of investments that were good ideas at the time, but without a master plan behind them. You may also be falling foul to what the legendary US fund manager Peter Lynch termed “diworsification”. Essentially, too much diversification can be a bad thing.
Evidence shows that 20-30 investments is the optimal amount to spread risk. If you own more, you might as well buy an index tracker fund that will give you a similar outcome at lower cost.
Any funds or stocks that represent 1 per cent or less of your portfolio are not likely to add much so weed them out.
Potential reward: Save time in ongoing monitoring of investments.
7 Add a diversifier
Some UK investors only hold funds that invest in the London Stock Exchange. There’s a wider world out there so look to add a global or US equity fund.
You can also spread your risk by buying assets that perform differently to equities, meaning if the stock market falls your portfolio may hold up better. Consider global bonds, UK gilts, and gold, plus some commercial property, commodities and private equity.
Potential reward: access wider opportunities and reduce volatility in the value of your portfolio over time.
8 Add an investment trust
Investment trusts have features that can help them outperform, such as a closed-ended structure that means they can take a long-term view without having to sell stock to meet redemptions. Their ability to borrow offers the chance to enhance returns but also means they can be considerably more volatile.
Studies have shown that, on average, investment trusts have outperformed funds over the long term. But the investment trust sector has its winners and losers, so choose carefully.
Potential reward: greater growth over the long term.
9 Add a dividend hero
Some 17 investment trusts have increased their payouts to investors for more than 20 years in a row, earning them “dividend hero” status. The City of London investment trust, Bankers Investment Trust and Alliance Trust are all marking 55 years.
Potential reward: Regular passive income from the stock market.
10 Take on a bit more risk
Are you holding too much in cash or too little in equities? Research by Interactive Investor found that a full 22 per cent of 18- to 34-year-olds have a low-risk pension investment plan, potentially damaging their chances of long-term growth at a time when they can afford more risk.
Potential reward: greater growth over the long term.
Moira O’Neill is head of personal finance, Interactive Investor