How to Maximise Your Investment Returns

I am constantly surprised by the number of clients that I meet who are disappointed by the performance of their Pension Plans and Investments.

Indeed many people will not consider Pension Plans because they feel that they are expensive, provide poor returns and only really benefit the provider and the financial adviser.

There is of course an element of truth in this belief. Generally speaking the returns from pension providers own internal funds are below average. This is also true of funds operated by the major banks.

The focus over recent years has been on fund charges culminating with the advent of Stakeholder Plans. These plans were available with a maximum charge of 1% per annum which has recently been increased to 1.5% per annum.

The Labour Government set up Stakeholder Plans to encourage people to make their own retirement provision instead of relying on the state for their retirement income. It was thought that one of the main reasons why people had failed to make adequate provision for their retirement was that they were put off by the high charges carried by Personal Pension Plans. Clearly this was not the case given the poor take up of Stakeholder Pensions.

So for many years the main focus of Pension Plans was charges but surely this is only one half of the story. Isn’t the investment return also important? Well of course it’s absolutely vital. It is the return net of charges which is important which means that an above average investment return is absolutely essential.

So how do you consistently achieve above average returns over the longer term?

It’s really about adopting an investment process which will determine your own unique tolerance to investment risk. After all not everybody has the same appetite for risk and therefore this should be assessed at the outset.

Once you risk profile has been determined then a portfolio of several investment area’s or Asset Classes can be designed. This will probably include Shares, Property and also Government Bonds and may also include Hedge Funds and Commodities. As the risk profile increases so you will see an increase in the proportion of Shares in the portfolio and ice versa as the risk profile decreases.

Once the Asset Allocation has been achieved the next stage in the process is to select the best available fund or funds with that sector. For example if your portfolio requires 30% UK Equity it may be beneficial to split this between two funds, perhaps an Income Fund and a Growth Fund. The final choice of fund is usually determined by such factors as the funds risk/return ratio, it’s volatility and the consistency of the return over perhaps 1,3 and 5 years.

Finally it is also important to ensure that the funds selected within your portfolio are not directly correlated. That is to say that they do not react in the same way to market movements. For example a portfolio containing only shares albeit geographically spread is likely to suffer more in a market downturn that a portfolio made up of diverse asset classes such as property and bonds.

Once you have invested it is essential to monitor the performance of your portfolio at least twice a year. Bear in mind that because the various elements of your portfolio are likely to grow at different rates the proportions of the different asset classes will change relative to each other. In order to maintain the initial risk profile it is essential to rebalance your portfolio at least once a year.

Using this method of portfolio construction and carefully selecting the best available fund within the asset allocation provides the best chance of out performing sector average returns.