Generating sufficient retirement savings to enjoy financial freedom in older age is a goal of a large number of investors. One way of helping to achieve it is to consistently outperform the FTSE 100. While that may sound rather straightforward, doing so can be more challenging than it seems. With that in mind, here are three steps which could help to improve an investor’s chances of beating the index over the long run.
While very few people enjoy thinking about tax, the reality is that it can make a considerable difference to an investor’s total returns in the long run. Even what may seem like a relatively minor tax saving in the short term can add up to a sizeable amount over the long run. As such, focusing at the very beginning of an investment career on minimising tax paid could be a worthwhile pursuit.
Fortunately, it is relatively straightforward to reduce tax when it comes to investing. A number of different accounts such as Lifetime ISAs and SIPPs allow an individual to avoid a variety of taxes including income tax, capital gains tax and dividend tax. By finding the right type of account given your personal circumstances, your net profit could be much higher when compared to a standard sharedealing account over the long run.
While timing the market is exceptionally difficult, focusing on how the economy is likely to perform in future could be a sound strategy. In other words, instead of simply investing for the long term, it could make sense to focus on companies or sectors that may benefit from changing economic conditions over the coming years. Similarly, avoiding those investments that may be hurt by the future state of the economy could improve returns in the long run.
For example, interest rates are due to rise over the next five to 10 years. This means that companies which have high debts could find it more difficult to generate the same level of profitability that they do today. Reducing exposure to highly-leveraged stocks could therefore be a sound move. Meanwhile, after a 10-year bull market, defensive shares may now offer a more appealing risk/reward ratio than cyclicals over the next decade. Rotating a portfolio towards defensive shares could be worthwhile in the coming years.
One of the most effective things that any investor can do to beat the FTSE 100’s average return is to keep buying during downturns. This may seem counterintuitive, but the reality is that falling share prices are good news for the long-term investor. They mean that it is possible to buy high-quality shares at low prices, and could provide wider margins of safety.
While buying during bear markets may sound relatively straightforward, having the discipline to do so is rarer than many investors realise. For those investors who can manage to do it, though, the rewards in the long run could make it extremely worthwhile.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.