Own sensible investment portfolios linked to your time horizon and minimise fees
Investment r i sk i s l i nked to your investment time horizon, which is your time to retirement. If you intend investing in a living annuity at retirement then your investment horizon is t he rest of your l i f e! You should always own well- diversified portfolios, ie your investments must be spread among shares, property, bonds and cash, with around 25% invested internationally. Investment risk refers to the proportion of equities (shares) in your portfolio. A high-equity portfolio has approximately 75% invested in shares and property and 25% in bonds and cash.
If your time horizon i s eight years and longer then you should invest in a highequity fund as this is likely t o produce t he highest r eturns over your t i me horizon and you can r i de out s hortterm stock market volatility. As your time horiz on s hor t e ns, your equity exposure falls as you have less time to recover f rom weak equity markets.
If you invest in a low-equity portfolio you must expect a lower return and thus need to save 47% more or 22% of your salary than investing in a high equity portfolio.
The investor’s return equals the portfolio’s return less the total cost of investing, which can include fees for advice (up to 1% of your investment), administration and Linked Investment Service Provider (LISP) platforms ( up to 1%) and i nvestment management ( unit t r ust expense ratios average 2% plus performance fees). Total fees vary significantly but average around 3% for most retail investors.
A sensible long-term investment return expectation is 5% per annum after inflation. Three percent in fees equals 60% of the return but compounds to erode 75% of your long-term return! If you pay 3% in fees then you must save 67% more or 25% of your salary to be in the same position as if you paid fee of 1%. Fees are critical but o f t e n n o t wel l disclosed and certainly not well understood b y most i nvestors.