10 Ways You Can Be A Better Investor in 2021

I am often asked how to maximise returns whist minimising risks. While the traditional risk to return ratio remains a yardstick in the investing universe, there are ways(I like to call them rules) one can follow to achieve such seemingly utopian objective. In today's article we review the 10 most important rules of investing. These are rules every investor should review to ensure they are investing efficiently in 2021. 

1. Manage Your Risk

The asset allocation model of your portfolio is the single most important aspect of investing, and is critical to ensuring your portfolio does not assume more or less risk than you are comfortable with. Investing in funds across varying asset classes allows you to diversify, minimising the impact on your portfolio should one sector take a dip.

But for many the lure of performance can lead them to make investment decisions that can have huge implications on their portfolio. When a particular sector performs well, investors without a disciplined strategy may be tempted to abandon their asset allocation model to increase their exposure to such markets. But such an approach makes investors vulnerable to market corrections.

In my experience, the vast majority of self investors who manage their own portfolio do not manage the asset allocation and associated risk of their portfolio well. Many advice led clients are also not receiving regular risk assessments and rebalances of the asset classes within their portfolio. 

For most, a broadly diversified portfolio of equities and fixed interest bonds, that is annually or semi-annually monitored and rebalanced will produce a reasonably structured portfolio that is both controlled and cost-effective. 

A certified financial advisor can add value by helping investors to set an appropriate strategy for periodically rebalancing their portfolios in a non-emotional, cost-effective and impartial way.

2. Select The Right Funds

Fund performance is a critical metric that efficient investors and high-quality financial advisors analyse to help ensure their portfolios productively meet objectives while utilising the proven top-performing funds. Top advisers want to ensure the portfolios they recommend use quality funds.  

Past performance is not a guarantee of future returns, but when asked, investors would prefer to invest in funds that consistently perform over varying time frames in the top 25% of their sector versus fund managers that perform in the worst 25%.

Although future performance is never guaranteed it is reasonable to assume the funds which have proven their consistency over a 5-year period, will continue to outperform their peers in the future. These individual funds demonstrate a consistency in their ability to do their job well.Selecting funds that consistently perform better than their peers and fit within a suitable asset allocation model will help investors to maximise their portfolio growth potential.

When going trough a financial adviser make sure you are partnered with someone that has performance knowledge and who can demonstrate that easily. As fund performance is not a regulated requirement of financial planning, financial advisers are not required to research the performance of funds. As a result, a large proportion of advisers have a poor level of knowledge in relation to fund performance. By ensuring your portfolio contains only consistently top-performing funds, within an asset allocation model suitable to your risk profile, you have covered the 2 main aspects of maintaining an efficient portfolio.

3. Select The Right Fund Managers

Each fund’s performance can be compared alongside all other competing funds that are classified within the same sector. How each fund compares can identify the quality of the fund and the competence of the fund manager.

For those that have maintained a high level of comparative performance, it is reasonable to assume they are more competent than those same sector managers that cannot consistently deliver over a reasonable time frame, 5 years being the benchmark.

4. Balance Quality Funds & Asset Allocation

The balance of investments across different asset classes is the primary driver of portfolio returns, but the funds used to create the correct balance are essential to maximising portfolio growth and efficiency. This is core to the strategy of any good financial advisor.

For example, a fund manager might take on a strategy favouring particular industry sectors over others when constructing their fund. Even though the fund might invest primarily in industries such as travel or tourism it can have the same sector classification as a competing fund which has a similar asset class but instead the fund manager might prefer to hold greater weighting in technology or healthcare companies. 

The outcome can be significant and one that can see a fund rank highly within its sector or one that sees the fund languish among the worst performers.

Formulating the appropriate blend of investment funds to fit a portfolio’s specified asset allocation model and optimise growth potential is a complex process that requires thorough analysis. It is an important part of our investment committee’s strategy and one which I believe provides investors with optimal investment portfolios for all market conditions. 

5. Invest For Growth

Investing by definition is about putting money to use by purchase or expenditure, in something offering potential profitable returns. Yet for some investors, growing their money is not the primary driver in their investment decisions. 

In recent years, the cost of investing has become more influential, with some investors focusing more at how much they can save in fees compared to the quality of investment products that offer the best potential for returns. 

Such an approach can prove to be costly resulting in investors missing out on returns that significantly outweigh the savings from investing in low-cost portfolios.

Each sector will have consistently top-performing funds when compared to all same sector funds. Those that prioritise experience and consistent performance first, and cost to invest second make use the better performing competitive funds, and generate better returns. 

To achieve maximum efficiency from your portfolio it is important to distinguish the value between a high quality, possibly more expensive product, to that of a lower-priced poor-performing alternative. Cost and growth must be a balanced assessment based on factual information.

6. Don’t Sacrifice Balance For Growth

Many investors spend substantial time defining their investment goals and selecting an asset allocation to help them achieve those goals while also being mindful of their tolerance to risk. To meet their objectives they must be able to stick with an appropriate investment plan in all kinds of markets.

But for some, the lure of performance can lead them to make investment decisions that can have huge implications. For instance, when a particular sector such as the North American or the Technology sector performs strongly, investors without a disciplined strategy may be tempted to abandon their asset allocation model to increase their exposure to these markets. But such an approach makes investors vulnerable to a market correction, which could have a huge impact on their chances of meeting their financial goals.

7. Choose Quality Over Cost

The impact of fees is also less than many are led to believe. For example, an initial investment of 250,000 euros into an investment portfolio with an initial management fee of 2% and an ongoing portfolio and management fee of 1.49% will have a higher value after 5 years than a portfolio where the initial and ongoing fees are just 0.3% simply by maintaining an annual level of growth that is on average 1.65% higher. 

It is also important to recognise that low-cost portfolio providers are forced to maintain their low fee structure in order to maintain the viability of their proposition. As a consequence, they are forced to overlook many high-quality funds that do not fit their cost structure in favour of lower-priced, and often lower growth alternatives.

When it comes to investing, cost will and should always be an important consideration, but it should never be the dominant factor. Investing is about growth and although many low-cost portfolios do just that, they have a deep-rooted flaw that will always limit their potential. As a consequence, the real value from investing is not in the short term gain from saving on fees but from the long-term value of investing in portfolios that focus on quality.

8. Make Sure Your Investments Are Protected and Vetted

As an investor, make sure the products/funds you invest in vetted by regulatory bodies such as the Financial Services Authority (FSA) in the UK, the AMF (Autorité Des Marchés Financiers) in France or the SEC (Securities And Exchange Commission) in the US.

The risk for investors is ‘should a fund management brand who owns/manages the funds you are invested in fail to cover their commitments then your money could be at risk’. 

Restricted firms that only sell their own funds, as well as multi-asset funds and ready made portfolios, provide products that are owned and operated by one fund management brand. This means that any investment in such products will bear a greater risk, should the firm and/or fund manager file for bankruptcy.

The chances of a fund management firm failing are small. Having said that, protecting against such scenarios should not be overlooked.To maximise protection investors must spread their portfolio of funds across several different providers.

9. Maintain A Suitable Balance

Against a constantly changing world, the most efficient investment outcome is often achieved using a blend of investments across several asset classes. A portfolio of diversified assets can shield a portfolio from the effects of market volatility, beat inflation, and provide long term capital growth as well as a regular income if required. 

Rebalancing is a critical component of investment management and without it the level of risk you assume with your investments can change significantly. It might seem surprising that your portfolio's risk level could change even if you didn't change any of your investments. But when one asset class is doing better than the others, your portfolio could become "overweight" in that asset class.

For example, imagine you selected an asset allocation of 50% equities and 50% bonds. If 4 years go by during which stocks return an average of 8% a year and bonds 2%, you'll find that your new asset mix is more like 56% stocks and 44% bonds.

In a nutshell, the purpose of rebalancing is to maintain a desired risk-reward ratio in an investment strategy. Rebalancing can consist of strategically selling investments and buying others in order to maintain an appropriate asset allocation, or it can consist of adding new funds and investing them in a strategic manner. 

10. Review Your Portfolio Performance

As an investor, a large portion of your assets are locked away for long periods of time, it is a significant financial commitment and one which success is primarily based on the quality of the fund and fund managers selected. Despite the importance of investment decisions, many investors are unaware that the funds in which they entrust their money are often of low-quality, and as a consequence, their portfolios lack efficiency and deliver diluted returns.

For many investors, the reality is they could achieve substantially greater portfolio growth by placing their money within proven, high-quality funds that have consistently outperformed their peers. But the only way to determine how efficient a portfolio is performing is by comparing the performance and ranking of each fund within a portfolio to all other funds within their specified sector. It is a service that all investors should utilise to gain a factual understanding as to how each of their individual funds has performed and how their portfolio as a whole compares to similar risk-rated portfolios.

In Closing

Investing is about maximising returns within an acceptable level of risk. Building and managing a portfolio by following these rules will ensure your portfolio contains a blend of consistently top-performing funds whose weighting has been balanced to make efficient use of their underlying assets. 

Get in touch with your certified financial advisor if you would like to discuss your 2021 investment strategy.