If you want to make the most of your investment journey, it could be wise to start thinking about how to maximise your potential gains (aka, the profits you make from your investments). After all, that's the reason why you're investing, right?
Here are 5 ways you could keep more of your returns.
Consider investing tax-efficiently
...with a Stocks and Shares ISAs
It’s not always well-known or understood, but when you invest, you could be required to pay tax on your profits (like Income Tax, Capital Gains Tax and Stamp Duty Reserve Tax). And this could make a significant difference to how much money you get to keep.
But luckily, there are ways to keep the taxman away from your pot and potential gains. With a Stocks and Shares ISA, for instance, you can invest up to £20,000 each tax year (subject to change in future), and you won’t need to pay tax on any profits you make. In other words, you’ll keep more of them.
...or a Personal Pension
Another way to invest tax-efficiently is to put your money in a Personal Pension. Just like Stocks and Shares ISAs, Self-Invested Personal Pensions (or SIPPs, as they're also known as), allow you to remove income and capital gains tax from the equation.
But it doesn’t stop there! With a Personal Pension, you’ll receive a little boost in the form of tax relief.
If you are a basic rate taxpayer, you’ll get a 25% top-up from the government every time you make a contribution. This basically means that for every £1,000 you pay in, you’ll only need to pay in £800 as the government will add the remaining £200. What’s not to love?
However, one thing to note is that this annual allowance is currently set at £60,000 per year (as of the 2023/24 tax year) or your earnings (whichever is lower). This allowance is the combined contributions made by you and the government.
Another thing to keep in mind is that with a private pension like this, your money will be locked away until you turn 55, though this age will change to 57 from 6th April 2028.1 So, make sure you're willing to commit long-term before making a decision.
Pay attention to investment fees
Just like tax, fees could also eat into your returns when you invest, so you'll probably want to try and keep them to a minimum. And how you do this will depend on how you invest.
If you’re choosing your own investments, it could be a good idea to keep an eye on your trading fees.
Typically, the more you buy and sell investments (like shares), the higher your trading fees will be, and the bigger their impact will be on your investment pot. So, if you want to keep more of your gains, try to resist the urge to buy and sell investments frequently.
If you’re using an online investment platform that does everything for you (like Wealthify), it could be a good idea to shop around and compare the different offers from similar services. What fees are they taking? What do you get in exchange for these charges?
Fees are important, but things like customer service and investment strategy, shouldn’t be overlooked.
Try to mitigate risk
If you want to maximise your returns, you’ll need to find ways to mitigate risk as much as is possible.
There’s no denying that investing isn't without risk because you could end up with less than you put in. This is because financial markets fluctuate from time to time, and the value of investments can go up down, as well as up.
If you withdraw when your investments are down (instead of waiting to see if they go back up), you'll end up at a loss. Basically, a loss may not actually be a loss until you take your money out.
But it could be possible to reduce this risk by spreading your money across various investment types and regions. This strategy is commonly known as 'diversification'.
By diversifying your portfolio, you typically decrease the odds of losing everything. Just think about it. If you invest all your money in one or two companies, then you could be in for a nasty shock if those companies were to struggle. However, if you’re spreading your money, poorly performing investments should be balanced out by others that are doing well.
Think about the long-term
Another way you may be able to mitigate risk and maximise returns is to commit long-term. And by 'long-term', we mean at least a couple of years.
In fact, it's generally accepted that when you invest, you will need to be prepared to stick with it for five years, or even longer than that.
Why? Well, because it could give your money more time to potentially grow. Financial markets go up and down for various reasons (like economic trends and global political events), and staying invested for longer may mean you have more time for them to recover from any dips these cause.
In fact, many studies show that the longer you invest, the more likely you are to see positive growth. As an example, people who’ve invested in the FTSE 100 (the largest 100 companies on the London Stock Exchange) for any 10-year period between 1984 and 2021 have actually had an 89% chance of making a gain.2
Get help if you need to
If you want to make the most of your journey, it’s important to make the right investing decisions. But this can be tricky for even the most seasoned investors as no one has a crystal ball.
If you have plenty of time on your hands and know enough about the markets, then you could invest on your own. But if you’re too busy or are simply not confident enough to do it by yourself, there’s no shame in asking for a little help.
We live in exciting times where you could become an investor in a couple of clicks (or taps) thanks to digital investment platforms, like Wealthify. We'll keep an eye on market movements and make all the decisions for you, such as what you invest in. And we don't charge massive fees for this either.
If you want to become an investor with us, you’ll just need to choose how much you want to invest (it doesn't have to be much), and the level of risk you want to take. We’ll then build your Investment Plan and make changes to what you invest in as and when this is needed.
We also offer a Stocks and Shares ISA so you can invest tax-efficiently and keep more of your returns.
2: Data from Bloomberg
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Seek financial advice if you are unsure about investing.