MARKET COMMENT
Three Ways To Boost Your Returns

By Cliff D'Arcy
August 12, 2004

One thing that's guaranteed to make investors miserable is when their portfolios under-perform the stock market. Every investor hopes to beat the market over the long term, but a remarkably large proportion fail to do so. After all, we must have losers in order to have winners, so some people are destined to reap lower returns than others.

If you're unhappy with the way your portfolio is performing, here are three simple ways to knock it into shape:

1. Ditch your dog funds

Investment guru Peter Lynch warns that many investors are guilty of 'pulling out the flowers and watering the weeds'. In other words, we sell investments that have performed well, while hanging on to our losers and hoping that they come good.

This happens very often with collective investments, such as unit trusts or OEICs, where investors fail to notice that their fund manager has produced a string of bad years. Thanks to changing investment fashions, every fund manager has the occasional bad year, but some (highly paid) fund managers are serial offenders.

Every year, independent financial adviser (IFA) Bestinvest produces its 'Spot the Dog' guide, which reveals the fund managers who have repeatedly failed to deliver the goods. In the latest report, Bestinvest identified 93 dog funds, in which a total of £10 billion is wasting away.

Unfortunately, eight out of ten fund managers under-perform their benchmark over a twenty-year period. So, if you don't feel up to identifying a star fund manager to make you money, consider switching into a low-charging index-tracking fund. This passively tracks the stock market up and down, producing returns only slightly below the market index (because of its annual charge).

2. Stop paying commission for non-existent support

Investment funds have up to three layers of charges:

• initial, entry or upfront charges, which can swallow 5% of your capital on day one
• annual management charges, which can amount to 2.5% a year
• exit or withdrawal charges when you cash in.

Buying through an execution-only fund supermarket or discount broker can reduce initial charges to zero. These middlemen do not offer advice; they simply pile funds high and sell 'em cheap.

Part of the annual management charge you pay, usually 0.5%, is paid to your investment adviser as 'renewal' or 'trail' commission. You pay this charge even if your investment adviser no longer contacts you - and even if you approached a fund management firm directly! However, a few IFAs will share this ongoing commission to you, or even refund it in full.

By re-registering (transferring) your investments to one of these firms, you could save £100 a year on a £20,000 portfolio. Learn more about discount brokers.

3. Switch to a low-cost online stockbroker

The more you buy and sell shares, the higher your dealing charges. These commissions can have a significant effect on your long-term returns, especially if you are a frequent trader. What's more, if you deal in relatively small amounts, say, under £2,500 per deal, these fees could swallow a significant percentage of your capital.

For example, if you trade six times a quarter with a high-street stockbroker that charges 1% per deal, with an average deal size of £4,000, you're looking at dealing charges of £960 per year. By switching to an online stockbroker that charges a flat fee of, say, £12.50 per deal, your annual dealing charges would fall to £300 - a saving of £660 a year.

Another benefit is that some only stockbrokers can 'deal inside the spread' (give you higher selling prices and lower buying prices), which means that you get more shares for your money. Learn more in Britain's Cheapest Brokers.

More: Be a smarter investor with our Index Tracker, ISA and Online Broking centres.