Ten investment tips for smarter returns

It is important to have a clear process and philosophy when it comes to investing, writes David Norman, co-founder of TCF Investment, a low cost fund manager. This forms the ‘route map’ as you make decisions. The nuggets below are designed to help achieve a prosperous future.

1.  A long term plan to meet you long term goals.

“…the five dimensions include: time horizon and liquidity needs, net income, net worth, investing knowledge, attitude toward risk.”(Harry M. Markowitz, Mark T, Hebner, Mary E. Brunson. Does Portfolio Theory Work During Financial Crises? 2009)

2.  Real assets outperform monetary assets over the long run.

William Bernstein notes that in the last century: “From 1901-2000, stocks rose 9.89% before inflation and 6.45% after. Bonds paid an average of 4.85% but only 1.57% after inflation, giving a real yield difference of almost 5%.”

3.  Strategic asset allocation delivers the majority of returns.

“The asset allocation decision is by far the most important factor in determining long term returns.”(Sandler Review: Medium and Long-Term Retail Savings in the UK, 2002)

4.  Diversification reduces risk and maximises return.

“Diversifying between asset class portfolios as well as within portfolios is more ‘efficient’ than doing only one of those, or neither.”(H.Markowitz, M.Hebner, M. Brunson. Does Portfolio Theory Work During Financial Crises? 2009)

5.  Active fund management is poor value on average.

“Out of 355 equity funds launched in the past 36 years (in America and until 2007), only 24 managed to outpace the S&P 500 by more than one percentage point a year.” (John Bogle, The Little Book of Common Sense Investing, 2007)

6.  Common sense rather than dogmatic philosophies prevails.

All the time and effort that people devote to picking the right fund, the hot hand, the great manager, have in most cases led to no advantage.”(Peter Lynch, legendary Manager at Fidelity Magellan)

7.  Don’t try to time the market.

“We have two classes of forecasters: Those who don’t know - and those who don’t know they don’t know.”(JK Galbraith, Canadian economist)

8.  Costs should be minimised wherever it is safe to do so.

“To pay no attention to costs is probably the biggest dumb mistake investors can make.” (John Bogle, founder of Vanguard)

9.  Beware hidden costs.

The costs of buying and then trading equities are significant and yet this has been deliberately hidden from investors, who are led to compare managers’ costs through a ridiculous and meaningless definition of cost, the total expense ratio. It is a nonsense as it ignores the greatest cost for clients, the costs of dealing”. (Alan Miller, former CIO of New Star Asset Management)

  1. Low cost, well diversified and left alone…

“UK investors can find mutual fund articles in their financial newspapers on a weekly basis. These articles will almost never discuss the mutual fund fees or comment on whether the fees are too high. Articles will almost never promote long term investing.” (Morningstar. Global Fund Investor Experience, 2009)

Editor’s Note: TCF has explained that this article has been prepared for general interest and information. It contains, or is based upon, information believed to be accurate and reliable. However you should not act on the basis of any matter in this article without obtaining specific professional advice.

Wednesday 2nd Nov 2011