Neil Messenger, Head of Financial Planning at Grant Thornton, has put together six cautions for those seeking long-term investments to grow their wealth
Instinct may be telling you to look for Warren Buffet’s ‘inevitables’ as good long-term investments – as we highlighted in Good for your wealth? Spotting an investment inevitable – but reason should be equally applied when making investment decisions.
The uncertainties of a sovereign debt-laden and volatile world have been made clear to us all over the past few years. However, such unpredictability persists in all market conditions and it is a constant source of both threat and opportunity. Here are some rules and reminders for those thinking of investing as a way to maximise wealth.
1. The market constantly corrects itself
Despite gloomy economic news, the equity markets rallied strongly through the first half of 2013 before dropping down. High-quality companies also suffer in sentiment-driven corrections so it is as important as ever to diversify by asset class, as well as by geography and sector. An investment portfolio should reflect your ambitions and the level of risk required to meet them. As time passes, and market corrections are weathered, the portfolio should be re-balanced to stay in line with the purpose of the investment.
2. Consistent winners are hard to find
Although many fund managers claim to beat the market over certain periods, it is hard to find genuine winners over the long term that outperform both their peers and their market. Often, it is less costly and more effective to use passive funds, where appropriate, which follow an established index to reduce the risk that a manager makes a bad call.
3. The more focused the investment, the more the risk
By looking for a small number of ‘inevitables’ an investor can easily sink considerable assets into a series of ‘imposters’. Be honest about your expertise and how much time you have to invest in researching and monitoring your portfolio. Using an independent adviser is often the most cost-effective approach.
4. The bottom of the market is only confirmed after the event
The old adage that value is driven by ‘time in’ the market, not ‘timing’ the market is still true. Rear-view mirror investing is as dangerous as bandwagon investing, and the effect is trusting to luck.
5. Costs and charges destroy value
No investment is entirely without cost. Be careful to investigate the total cost of any investment you make as layers of charging may combine to produce a significant drag on investment performance. Balancing the cost of the service you receive against the value it creates is a key decision. Employ an independent adviser who is able to drive down charges without reliance on their own products.
6. Use tax-efficient investments
Consider using the allowances and exemptions that are available as early as possible to maximise the benefits. Both pensions and ISAs offer very tax-efficient environments for long-term investment growth. Investments that are liable to capital gains tax (CGT) can be managed to use the annual CGT exemption to increase their efficiency over time. Once earnings are sufficient, other tax-efficient investment options can mitigate income tax and attract other tax benefits. Tax-efficient investing is a complex subject and specialist advice should be sought.