We humans are natural comparers. Whether it’s career, the car we drive or how many holidays we take a year, we’re constantly comparing ourselves to others – friends, siblings, colleagues, neighbours and more or less everyone we see in the street or on TV. Comparing the performance of our investments however is slightly trickier. The digital age allows us to check our own investments with dizzying speed – two or three taps – but how can you tell if your money is performing as well as it could be – and what can you do about it?
Here are five things to think about when considering performance.
Think about your investment choice
A major influence on how well your portfolio performs is your choice of investments. Choosing lower risk investments like bonds and cash equivalents means slow and steady returns with less chance of suffering big losses. The compromise is you’ll likely only achieve modest returns, towards the lower end of the range of potential performance. The opposite is true of higher risk investments like shares. You’re at risk of greater potential fluctuations in the value of your investments but have the potential to gain more in the long term. It’s a classic risk versus reward conundrum – how much are you willing to risk, for better potential returns.
Think about your goals
Goals – and by association, your investing timeframe – should play a key part in your decision-making. If your goal is a house deposit or wedding and is less than 5 years away, it’s possible investing isn’t even suitable for you. Goals of between 5 and 10 years are better suited but might still affect the level of risk it’s sensible to take. As a rule of thumb, the longer your timeframe, the more suitable higher-risk investments become. Someone in their 20s starting to save for retirement can reasonably expect a 40 year + timeline and is therefore well-prepared for an investment strategy that aims to maximise their returns, even if that means big fluctuations along the way.
Think about the cost of your investments
Fees and charges can have a big effect on the performance of your investments since fees are ultimately paid out of your returns. You might think paying an all-in annual fee of 2.5% a year for a traditional wealth manager is justified, but when you can get a similar service for just 1% per year, you should think carefully about which represents the better value for money. That 1.5% fee difference could really add up over the years. Beware of platforms that have a ‘menu’ of costs and charges, as you could get a nasty surprise when you total it all up. Instead, go for a service that charges a flat fee for everything and always read the fees information to check whether you need to factor in extra costs which are not charged by the provider, but may still apply.
Think about benchmarks
A good way to compare your investment performance to that of others, without the awkward conversation over the garden fence is to use a benchmark like the ARC Private Client Indices. This shows the average performance of thousands of similar managed investment portfolios to your own, across a range of risk levels. Benchmarks like ARC put the power in the hands of the consumer, giving you tangible means with which to hold your investment manager to account, should your returns fall well below the average. If only there were such a reliable benchmark for comparing all aspects of our lives to those of others!
Think about taking action
With all these handy tips, everyone can measure their performance and make sure their investing decisions are in line with their goals and timeline. If you find your returns fall below expectations, consider transferring your investments to another provider and always make sure you choose one with low annual fees.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Investing is for everyone.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.