While picking the right stocks at the right time is important in delivering a high return, there are a number of other factors that heavily influence portfolio performance in the long run. Here are four that could have a positive impact on your returns.
Keep costs down
One of the easiest ways to boost returns is to keep costs down. One way of doing this is to buy and hold, rather than seek to trade stocks. This means that the commission costs of buying and selling are much lower in the long run and this can have a major impact on total returns.
In fact, assuming an investor has a portfolio of 25 stocks and buys and sells each stock once every five years, the cost of dealing, assuming a £12.50 charge for each buy and sell, is around £125 per year. Assuming the same investor bought and sold each stock every six months, their annual cost is a whopping £1,250. Over a 10-year period, this results in a difference of £11,250 between the buy-and-holder and the trader.
While holding 25 stocks in a portfolio may seem like a large number to a lot of investors, diversifying among a substantial number of companies is crucial to long-term success. That’s because any company can have a profit warning, any industry can experience a prolonged downturn and any country can undergo a period of disappointing GDP growth.
Therefore, having a number of different companies trading in different sectors and different regions can reduce company, industry and geography-specific risk. Certainly, it won’t eradicate it completely, but it can help to generate more consistent and less volatile total returns in the long run. And diversification also makes living with investments much easier, since it can equate to less worry about one holding experiencing a major share price fall.
Focus on dividends
With the FTSE 100 trading at a lower level than in the year 2000, capital gains have been hard to come by for most investors in the last 16 years. And with various studies showing that dividends have historically made up the majority of total returns, buying higher-yielding stocks could prove to be a sound move.
Not only do income stocks provide a great income return, they also usually offer a dividend that’s growing at a faster pace than inflation. This provides the investor with a real-terms increase in their income over a prolonged period, which could prove to be a useful ally. And with interest rates set to remain low, high yields could remain in vogue in the coming years, thereby providing capital growth for income investors as their shares are bid-up.
Seek tax advantages
By investing through tax-efficient accounts, investors can increase their total returns through paying less tax than they otherwise would. For example, having a pension or an ISA and investing through it can save on income tax and capital gains tax. Furthermore, dividends received in an ISA don’t contribute towards an individual’s taxable income. And while such benefits may not make a huge difference in the short run, over time they can really add up and lead to much more impressive returns over an investor’s career.