Investing is not speculating
Investing and speculating are two very different things. Investing is a long-term diverse strategy which uses compounded growth to generate returns.
Speculating is taking a position where you could win or lose. By speculating for every given winner there is a loser. We always hear about the people who have won whilst speculating, but usually very little from those who have lost!
Market Efficiency
By making an investment it is an automatic right that you should demand a return from your capital. This return does not always come each year but you will be rewarded over the long term for making an investment. This is the prime function of wealth creation under a capitalist society.
The role of a marketplace is to match those who require capital with those who have capital to invest and require a return. Over time the market place is efficient at pricing risk. Therefore, instead of wasting time trying to pick the best fund managers and probably getting it wrong! At Money Tools we concentrate on trying to capture the average market return which carries a degree of predictability.
Risk and return
There is a relationship between risk and return, the more risk you are prepared to take then the greater the expected return. The riskier the asset class the greater the expected return, there is no free lunch!
Therefore if you are adding risk to your capital you should expect to receive a higher rate of return, if not why take on the risk in the first place, leave your money in the bank!
Disciplined process
A structured disciplined approach to investing yields greater returns over the longer term than speculating on individual stocks and market mis-pricing. Academic research has proven that over 90% of investment returns are down to which asset classes you invest rather than which fund you select or how good you can be at timing the market.
Diversification reduces risk and enhances returns
By spreading the risk amongst different asset classes it reduces the level of downside risk whilst also increasing the expected returns.
It is not possible to achieve long- term returns in excess of the risk- free rate (cash deposits) without taking on any extra risk.
Should you put all your eggs in one basket and keep a close eye on the basket? Or spread your eggs amongst a number of baskets? At Money Tools we think “diversify to multiply”.
Lower expenses increase investment returns
Fund management costs affect portfolio returns, and are measured by a Total Expense Ratio (TER). Stockbrokers and Active Fund Managers have relatively high costs. All those analysts, sales glossies and star fund manager fees have to be paid from somewhere!
In periods of low equity growth, TERs can dramatically eat into returns. By using institutional grade asset class strategies which are very low cost, this increases returns and leaves more money with the client.
Tax management
By reducing leakage and not paying more in taxation than in necessary, this has a similar effect as reducing charges on a portfolio. There are tax planning strategies which can be employed which maximise efficiency across the portfolio.
