Here are, in my view, the five factors that can dent your wealth.
1. Looking backwards rather than forwards
This is a perennial problem in investing – so much so that the Financial Conduct Authority (FCA) feels obliged to warn investors that “past performance is no guide to the future”. It is easy to be reassured by an investment that everyone else likes, but when an investment has reached peak popularity, there is really only one way it can go. Inevitably, investments that have risen a long way are likely to be more expensive and investors need to ensure that they aren’t buying at the top of the market.
This is not the same as saying that strong performance can’t endure for a number of years. The US mega cap technology sector has been strong for more than a decade, albeit in slightly different guises. Past performance can be informative – it just shouldn’t be the only reason you’re buying something.
The best way to approach it is to always pay more attention to the future than the past. If a sector has had a significant move, you need to ask yourself whether the growth story is still intact or whether you just have a touch of FOMO.
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2. Neglecting income
Stock markets have had a very good couple of years. The MSCI World Index was up 24% in 2023, and 19% in 2024. It is possible that it may see the same magnitude of growth in 2025, but it would be unusual. This is likely to mean that dividends will become a greater share of your overall return.
This is much more the norm in history. Stuart Rhodes, manager of the M&G Global Dividend Fund, points out that dividends have accounted for the majority of total equity returns over the past three decades. Compounded over time, dividends can be a potent source of returns for investors.
Dividends also tend to be a more predictable source of return. There have been periods – such as during the pandemic – when aggregate dividends have fallen, but they have generally bounced back quickly. Also, dividend payouts from companies usually increase in line with inflation. The M&G Global Dividend Fund has a specific target of increasing its dividend stream year-on-year.
3. Leaving it to the last minute
The temptation with ISAs is to ignore them for most of the year and then frantically cram in as much as possible at the end of the tax year to make sure you use your allowance. This is not the best approach. Studies suggest that those who invest early in the tax year are better off than those who leave it to the last minute.
This is logical. Stock markets don’t always go up, but they have gone up in 10 out of the previous 14 years, so by investing early, you’re more likely to benefit from stock market growth. Equally, if companies pay dividends, you’ll get more of them. Overall, investing early in the tax year means that you get the benefit of tax-free compound growth for longer.
4. Being too cautious
Investors subscribed to around 12.4 million adult ISA accounts in the tax year 2022/23. This suggests the UK has some healthy savings habits. However, around two-thirds of those ISAs were in cash, and this continues to grow, in spite of the strong performance of stock markets. In the same year, the number of people subscribing to stocks and shares ISAs decreased by around 126,000.
There is nothing wrong with cash. Holding a proportion of your wealth in cash as a cushion against tougher times is a sensible strategy. However, advisers tend to recommend that this is 3-6 months’ worth of expenses and certainly not the entirety of your savings. The danger in being too cautious is that the purchasing power of your savings doesn’t keep pace with inflation. If you have 3-5 years to invest, a stock market investment is likely to be more profitable.
If you’re nervous about volatility, there are plenty of low-volatility fund options that don’t bear the full weight of stock market ups and downs; for example, the Ninety One Diversified Income Fund or the Schroder Global Multi-Asset Cautious Portfolio.
5. Not being diversified
This is a particularly important consideration for this year. Investors have gravitated towards a handful of technology stocks and global stock markets now look highly concentrated. This hasn’t been a problem while they have been performing well, but the recent wobble for Nvidia should remind investors that there is risk involved.
Michael Cumberlidge, an equity specialist on the Rathbone Global Opportunities Fund, says this isn’t the first time Nvidia’s shares have been so turbulent.
He said: “Rather remarkably, Nvidia accounts for seven of the 10 worst single-day stock losses by value in history, with the recent 17% sell-off leading the way.
“Given the exceptional rise in popularity of passive investments over the past decade, many investors will have taken the full brunt of this big fall. A full third of a passive US stock portfolio is invested in just seven companies, hugely impairing diversification. These market-weighted index trackers obviously can’t reduce their holdings when stocks become overvalued or when they become a risk through their sheer size. Active managers can, though.”
Be careful how much you have in the technology giants and make sure you are diversified elsewhere. They may continue to go from strength to strength, but you don’t want to leave yourself vulnerable if they don’t.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
