Moneyfarm scooped the prestigious title of Best Investment ISA – Medium Portfolio at the YourMoney.com Investment Awards 2024. Here are five aspects that impact your ISA investment returns.
Moneyfarm won the Best Investment ISA – Medium Portfolio category at the YourMoney.com Investment Awards 2024 – the second consecutive year it has scooped this title.
As part of YourMoney.com‘s special award winner spotlight series, Chris Rudden, head of investment consultants at Moneyfarm, explains five aspects that impact your ISA investment returns.
Five aspects that impact your ISA investment returns
Investing in the stock market can be hugely rewarding, but it comes with its fair share of complexities. To navigate these challenges and optimise your investment returns, it is crucial to understand the key factors that can significantly impact your ISA portfolio, and other investments you may have.
1) Timing
One of the most critical yet challenging aspects that every investor faces is timing.
Historically, the average investor will tend to underperform the market if they manage their own investments. This underperformance often stems from emotional decision-making, selling when the markets fall and buying during market upswings, often at the top of the market. This reactive strategy can lead to significant underperformance.
A more effective investment strategy is to invest for the long term. This approach allows you to benefit from the overall growth trajectory of the markets. By riding out short-term market fluctuations, you position yourself to capitalise on long-term gains.
Market timing can be unpredictable and stressful. So, adopting a long-term perspective can lead to more consistent and substantial returns. Over the last twenty years, we have had the worst financial crisis since World War II, more bubbles than I can count – to name a few, the biotech bubble, the blue-chip equity bubble, and the Internet bubble – and the unprecedented events of Covid-19. Investors often end up shooting themselves in the foot by trying to predict market movements.
The key is consistency and patience, rather than trying to time the market for short-term gains.
In my years in the role, this is hands down the biggest obstacle that clients face.
2) Fees and charges
While many aspects of investing are beyond your control, the fees and charges associated with your investments are not. These costs can significantly erode your returns over time. Therefore, it is essential to be vigilant about the fees you are paying for investment management, trading, and other related services.
Choosing low-cost investment options, such as index funds, ETFs or an ISA with minimal fees, can make a substantial difference to your net returns. Over the long term, even small reductions in fees can compound to produce significant savings.
Always review the fee structure of any investment product and consider the impact on your overall portfolio performance. However, be conscious, as cheap doesn’t always mean good value – some services can offer aspects that the really cheap ones can’t and quite often there can be hidden fees. So take everything into consideration when looking at fees.
3) Diversification
Diversification is a time-tested strategy to mitigate risk in your investment portfolio. The adage “don’t put all your eggs in one basket” holds especially true in investing. By spreading your investments across various asset classes, industries, and geographic regions, you can reduce the impact of any single investment’s poor performance on your overall portfolio.
Currently, market growth is heavily driven by a few large US tech stocks. While these stocks have performed well recently, relying solely on them can be risky and expensive.
Instead of chasing last year’s winners, focus on maintaining a well-balanced portfolio that aligns with your risk tolerance and investment goals. A diversified portfolio can help you achieve steady growth and protect against volatility in any one sector.
4) Risk tolerance
Understanding your risk tolerance is crucial for making informed investment decisions. Risk tolerance refers to your ability and willingness to endure fluctuations in the value of your investments.
It is influenced by various factors, including your financial situation, investment goals, and psychological comfort with risk. The late Daniel Kahneman, the Israeli-American cognitive scientist, did a lot of work looking at the psychology behind investing and people’s behavioural biases.
These biases generally contribute to investors underperforming as a result of their natural decision-making, the key ones being ‘prospect theory’, otherwise known as loss aversion, and ‘overconfidence’. Risk-averse individuals may avoid investments with higher potential returns due to fear of loss, while overconfident investors may take on excessive risk, expecting higher returns without considering potential downsides.
Generally, higher-risk investments tend to offer better returns over the long term. However, they require a longer time horizon to smooth out short-term volatility. It is essential to strike a balance between risk and reward that suits your personal circumstances and investment timeline.
5) Market conditions
Market conditions, including global and geopolitical events, interest rates, and economic trends, play a significant role in investment performance. However, while these factors are highly relevant in the short term, they can often be viewed as minor obstacles in the context of a long-term investment strategy.
For example, geopolitical tensions or changes in interest rates can lead to market volatility. However, over the long term, markets tend to recover and continue their upward trajectory.
It can be beneficial to adopt a patient approach. It sounds counterintuitive, but burying your head in the sand and leaving your investments alone during turbulent times is often a much better strategy. By focusing on long-term goals rather than short-term market movements, you are more likely to achieve better investment returns.
Ultimately, investing is a process that requires careful consideration of various factors.
By understanding the importance of timing, managing fees and charges, diversifying your portfolio, assessing your risk tolerance, and considering market conditions, you can make more informed decisions that enhance your investment returns.
Adopting a disciplined, long-term approach and avoiding emotional reactions to market fluctuations will position you for success in the ever-changing world of investing.
Chris Rudden is the head of investment consultants at digital wealth manager at Moneyfarm
Moneyfarm is an award-winning pan-European digital wealth manager with over 130,000 active investors and more than £3.5bn in total assets on the platform.
Launched in 2012 and headquartered in the UK, Moneyfarm has a vision to help more people improve their financial wellbeing by making personal investing simple and accessible through technology. The business is a disruptor and considered to be one of the most influential fintechs in the UK and Italy.
