Seven Ways To Improve Your Investment Returns Without A Crystal Ball. By Robin Powell.

At this time of year, newspapers are full of suggestions about how to improve your investment returns over the next 12 months.

Although some of them are sensible, most of the tips on offer are really not very helpful. Many of them are simply based on what investments performed well or badly in 2023. But the best and worst performers in 2024 are unlikely to be the same as last year.

To pick this year’s winners in advance, you need to predict the future, and that is extremely difficult. Here at rockwealth, we avoid such predictions and focus instead on academic evidence and peer-reviewed data.

The good news is, it is possible to improve your investment returns without relying on a crystal ball. Here are seven ways to do it.

 Be humble

The goal of most investors is to beat the market. But outperforming other investors by picking the right stocks, funds or sectors or getting in and out of the market at the right time is extremely difficult. To quote Charlie Munger, the legendary investor who died recently, “it’s not supposed to be easy. Anyone who finds it easy is stupid.”

It’s human nature to be overconfident, or to think we know more than we actually do. But there are hundreds of thousands of professional investors around the world with far more information and experience than the rest of us, and with the latest technology at their disposal. Only a tiny fraction of professionals beat the market in the long run, so it’s completely unrealistic for ordinary investors to assume they will do any better.

Bear in mind as well that being very smart and knowing all there is to know about a particular stock, for example, is not enough. Stock prices often do the very opposite of what the experts expect. As the economist John Maynard Keynes once said, “markets can remain irrational longer than you can remain solvent.”

So be humble. Stay within your circle of competence. And beware that risk comes with not knowing what you’re doing.

Diversify

Instinctively, we all know it doesn’t make sense to put all your eggs in one basket. Yet most investors are too heavily exposed to a narrow section of the market. For example, they over-invest in a certain sector — perhaps one they work in and think they have expert knowledge of. Or they might have more than half their portfolio in UK equities, even though the UK represents only a very small part of the global economy.

The evidence clearly shows that the logical choice for the vast majority of investors is to be broadly diversified across different asset classes, industries and geographical regions. In fact, diversification has been described as the only free lunch in investing. It not only reduces the risk of being too heavily concentrated, but it can also help you achieve better — and more more stable — returns in the long run. That’s because different investments often perform differently under the same economic conditions, so when one asset class underperforms, another may outperform, balancing the portfolio.

“The purpose of diversification,” the famous investor Ray Dalio explained, “is so that when one investment goes down or is not doing well, you are insulated from the result because you have other investments that are doing better.”

Pay less

There are very few things that we, as investors, are able to control.  We can’t control the financial markets, and nor can we control events or how investors react to them. But we can control the fees and charges we pay.

With most of the things we buy, we expect a better product or service the more we pay for it. But, with investing, the opposite is true. In other words, the less we pay, the better the investment returns we can usually expect.

“Beware of little expenses,” Benjamin Franklin once said. “A small leak will sink a great ship.” And keeping costs low as an investor is crucial because they can significantly erode returns over time. Even small percentages in fees, compounded over years, can amount to a substantial portion of potential earnings.

Lower fees mean more of your money remains invested, benefiting from compound interest and market growth. This is especially important for very long-term investments, such as pensions, where the impact of high fees can be magnified over decades. In essence, minimising fees maximises the potential for your investments to grow, ensuring more of your money works for you, not against you.

Automate

Left to our own devices, human beings don’t make good investors. One of the biggest mistakes we make, for instance, is that we don’t make investing a big enough priority. We spend money now that we should be putting away for the future. When the cost of living rises, instead of cutting back on luxuries we don’t need, we might stop investing altogether.

Thankfully, there is a simple solution: automation. ”The best investment you can make,” according to the financial author Ramit Sethi, “is in a system that automatically manages your money for you.”

Automating your investments ensures consistent and disciplined investing, which is essential for long-term financial growth. It eliminates the emotional pitfalls of market timing, allowing you to benefit from pound-cost averaging, where regular contributions can average out the purchase price of investments over time.

Automation also makes investing simpler, reducing the likelihood of missed contributions and helping to build savings effortlessly. By setting up automatic transfers to investment accounts, investors can prioritise their financial goals, effectively implementing a “pay yourself first’ strategy”. This approach is key to building wealth steadily and reducing the impact of market volatility on investment decisions.

Be tax-efficient

We’ve already explained why controlling your costs is so important. But investing in a tax-efficient manner is also crucial, because it maximises investment returns by minimising tax liabilities.

Utilising vehicles like pensions or Individual Savings Accounts (ISAs), which offer tax-free growth or tax relief, can significantly enhance long-term financial gains. Pensions are especially tax-efficient, because you receive tax relief on the way in, growth is largely tax-free, and 25% is tax-free on the way out.

“Every investor should take advantage of the tax shelters available, like ISAs and pensions,” says Martin Lewis from MoneySavingExpert. “Not doing so is like turning down free money.”

The tax advantages of ISAs and pensions compound over time, leading to a substantial increase in wealth compared to taxable accounts. By reducing the tax burden, investors retain more of their earnings, allowing them to reinvest or save more.

In addition, efficient tax planning, including utilising annual allowances and understanding inheritance tax implications, can also preserve wealth for future generations, and is a vital part of financial planning.

Ignore forecasts

This is the season for all kinds of forecasts for the year ahead. But forecasting anything, whether it’s the direction of the stock market, the economy, interest rates or elections, is very hard to do consistently with any. degree of accuracy.

As the economist John Kenneth Galbraith once noted, “we have two classes of forecasters — those who don’t know, and those who don’t know they don’t know.”

The reason why financial markets are particularly hard to predict, at least in the short term, is that they are very efficient. In other words, current prices reflect all available information. If you like, markets aggregate the knowledge and skill of professional investors around the globe, and prices respond within seconds to new information.

But even if you knew, in advance, who was going to win the upcoming elections in the UK and US, for example, what will happen in the Ukraine or in Gaza, or whether we’re heading for recession, that doesn’t automatically mean you could profit from it. Why? Because markets react to events in totally unexpected ways.

Sure, forecasts can be interesting to read, but it’s highly unlikely you’ll improve your investment returns in the long run by making decisions on the strength of them.

Stay invested

There are three basic rules of investing: start investing, keep investing, and, last but not least, stay invested.

“The key to making money in stocks is not to get scared out of them,” says former fund manager Peter Lynch, and he’s absolutely right.

Although markets are inherently volatile in the short term, they tend to increase in value over the long term. Reacting to short-term fluctuations can lead to poor decision-making, such as selling low and missing out on subsequent recoveries.

Market noise often reflects temporary sentiments and speculation. By remaining focused on long-term goals and maintaining a well-diversified portfolio, investors can ride out periods of volatility, benefit from the power of compounding, and achieve stable and consistent returns over time.

There are bound to be times in 2024 when markets fall sharply. But reducing your exposure to equities or bailing out altogether when they do is an irrational response. Remember that time is your friend, and impulse is your enemy. And it’s not timing the market, but time in the market that really counts.