Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. You may not get back the amount originally invested.
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WHERE DO MANY INVESTORS GET IT WRONG?
Investors often start by filling their portfolios with funds run by the top-rated fund managers. But the reality is that the ‘best’ funds do not lead to the ‘best’ portfolios.
Here are three habits shared by some of our most successful investors.
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3 HABITS OF HIGHLY
EFFECTIVE INVESTORS
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understand their portfolio risk
Successful investors begin investing by first considering the risks they are prepared to take. They carefully consider the asset classes they want to invest in, to facilitate the construction of a balanced portfolio.
Do you understand your portfolio risk? -
know what’s driving performance in their portfolio
It is important to identify what is driving the performance within your portfolio. Successful investors are able to select the most appropriate investment vehicles to get the most desired outcomes.
Do you know what’s driving performance in your portfolio? -
use a range of investment tools
As the investment universe grows, there is more opportunity and choice when it comes to selecting investment tools. Successful investors have realised that there is not just one way to invest.
Have you considered the range of tools you use? -
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IT’S TIME TO BUILD BETTER PORTFOLIOS
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Explore more nowThey understand their portfolio risk
We’ve found that successful investors begin by carefully considering the risk they are prepared to take, as this can be easily controlled by carefully choosing the assets they invest in. For example, an investor who wants less risk might make sure that a large part of their portfolio is invested in lower-risk bonds.
The aim is to design a portfolio that balances the return an investor wants with the risk they can afford to take.
Keep your balance
Instead of buying heavily into one kind of investment that could drop in value and bring your whole portfolio down, the right balance of investments keeps successful investors diversified across the market.
Investors who have given thought to the asset classes they want to invest in, and their broad market exposure, have a much better understanding of their portfolio and the risks they are taking.
This is key to achieving investment goals.
LOREM IPSUMWhat guides your investment choices
Your time horizon: This refers to how many months, years, or decades you have to achieve your financial and investment goals.
Your time horizon will influence how much risk you are prepared to take. Someone 25 years old and just starting to invest could potentially afford to make more risky investments, as there’s more time to recover from steep price falls. Someone close to retirement might want to be invested in a more cautious way.
Here is a simple example of how an investor’s spread of investments (also known as asset allocation) could change from their 20s through to the years to retirement.
Your attitude to risk: How much risk are you comfortable with? Could you handle losing some, or all, of your investment for the chance of a higher return?
Unlike your time horizon, your attitude to risk is personal. Some investors love the thrill of chasing high-risk returns, others may feel they have enough risk in their lives – with their career choice for example – and they would rather be cautious investors.
It’s worth remembering that adventurous, higher risk investments do not always provide better returns. Take a look at these graphs that compare annualised risk and annualised return over different time frames.
** These graphs show why it is crucial to consider your time horizon, as well as your own level of tolerance to the amount of money that you might lose on any given day, month or year.
LOREM IPSUMWhat does this mean for investors?
Choosing the spread of investments best suited to you doesn’t have to be complicated. We think index funds and Exchange Traded Funds (ETFs) are excellent tools to help investors put their plans into practice.
- Indexing can give investors exposure to a broad basket of stocks and/or bonds. For example, an investment in an index fund or ETF tracking the MSCI World Index gives an investor exposure to over 1,500 companies from 25+ countries and 10+ sectors.
- Indexing provides a simple and transparent way to put your asset allocation decisions into practice and stay in control of risks.
Benchmark beating
Fund managers are expected to make stock choices that lead them to beat their benchmarks. But these stock choices all have implications for the risk of the fund and on the overall portfolio risk.
Picking the right funds or shares is not what will define your success. Considering the risk of your investment portfolio as a whole is a better approach that will ensure your investment choices are driving towards your goal.
NEXT STEPS
They know what’s driving
performance in their portfolio
Markets drive returns
Wide-ranging research since the 1980s proves that an average 90% of the variability in a portfolio’s return can be explained by the markets and the investment factors the portfolio is exposed to.
This means only 10% of the variability in a portfolio’s return is due to a manager’s deliberate decisions, such as choosing a particular stock or bond to buy.
What does this
mean for investors?
Because they know that portfolio outcomes are driven mainly by broad market exposures, successful investors tend to use more index investments, such as ETFs and index mutual funds, in their portfolios.
As index investing is much cheaper, this lowers the overall cost of the portfolio and reduces the need to search for alpha-seeking managers. This allows investors to select just the few fund managers they believe can outperform the market.
They use a range of
investment tools
Use more tools
With the growing number of investment tools available to investors, it is becoming obvious that there is not just Every kind of investing can now be done via an index. If you want to invest in, for example, China, technology, sustainability, long-term megatrends, and gold – there is an index investment that can put the plan into action, cheaply and simply.
There’s been a vast increase in the ways that investors can diversify, and successful investors have regularly reviewed their choices and made changes to take advantage of all the new possibilities.
What does this
mean for investors?
With so many index strategies available, the high fees charged by alpha-seeking managers are less justifiable, especially for long-only strategies. Many successful investors have been able to achieve manager-beating outcomes much more cost effectively by indexing.