Maximise Your Investment Growth

Many people are intimidated by the idea of investing their hard-earned money. The prospect of losing any of their money is too daunting to contemplate. However, following some sound principles can give you the best chance of achieving good growth without taking unnecessary risks. Following these principles can provide peace of mind that you are doing the right thing while the world is going crazy.

Aim for a balance between rewards and risk

Achieving a balance in your investments is essential. Allocating all your money to one asset in the hope of attaining outsized growth will result in unnecessary risk. Investment horror stories are usually caused by people aiming for too much growth without understanding the risk of losing money. A fundamental principle of investing is that pursuing high returns involves accepting a high level of risk. There are NO risk-free investments that have the potential to beat inflation over the long term. If someone offers you an investment that carries no risk of loss and can deliver 25% growth per year (as an example), you are being sold a story. It could be a scam, or someone is not explaining all the risks to you.

Most investors will benefit from owning a range of different assets and having a reasonable allocation of money to various countries. This principle of diversification is known as the only free lunch in the investment world. To reduce risk, you should ensure that you own shares, bonds, property and cash. If one asset type loses a significant amount, you have other assets that should limit your total losses.

It is also essential to maintain the correct proportion of asset types. For instance, shares offer the greatest potential growth but pose the greatest risk of loss. That means you should have a significant allocation of shares to achieve good long-term growth, but you should also maintain a smaller allocation of cash, bonds, and property.

The time horizon of your investment objectives is very helpful in determining your asset mix. For instance, if you want to save for a house deposit in three years, you should not invest in shares but allocate this money to a money market or fixed deposit account. Money markets are very low growth and low risk. They are ideal for short-term goals. However, if you want to build up your investments for the next 20 years, you need to allocate a significant amount of money to shares with a much smaller allocation to cash. This will provide the best chance of inflation-beating growth.

Control your costs

All high-quality investments will carry some costs. If you are offered an investment that is “free,” you need to exercise some caution. Good investments are never free; it just means you have not discovered the real costs yet. Some product providers will offer very low cost options at launch, and once they have built up a significant number of clients, they will increase their fees substantially and hope to retain a large portion of their clients. I prefer to pay a reasonable fee for high-quality investments offered by companies that provide good service, high-quality administration and proper tax reporting.

Focus on tax

You should always focus on maximising your tax benefits. Try to pay the least amount of tax that is allowed by law. However, you should not select investments purely for their tax-saving benefits. Many product pushers will sell you a lousy, high-cost product to save tax. Don’t lose sight of the main goal, which is capital growth. If you have to pay some tax as you achieve growth, that is far better than avoiding tax but achieving limited growth.

Time is your superpower

Ensure that you give yourself enough time for your investments to grow. Markets usually deliver tremendous growth over periods longer than five years. If you can remain invested for long periods while everyone else is caught up in the short-term noise, you will give yourself the best chance of achieving maximum investment growth.

Conclusion

Investing can be frightening and very complex if you treat it as a short-term action sport. Instead, aim for long-term, reasonable growth investments that provide mundane returns over short periods but outstanding returns over long periods. The only way to achieve this aim is to remain invested when everyone else is panicking and let your money compound while you calmly continue your life!

By Warren Ingram, CFP®. Co-founder of Galileo Capital