Get Better Returns
The holy grail of investing is a safe investment with stellar returns. Martin Hawes has searched for 40 years and never found one, but he suggests some strategies that might work.
24 August 2022
We all want our money to work as hard as possible, and to grow our money as fast as we can.
Finding the best investments, the ones that will give us better returns, seems to be the name of the game.
However, the problem with investment is that every time you mention the word “returns” you have to remember the word “risk”.
When people go out to get better returns, they often do so by taking on more risk.
This may be no bad thing of itself but there is one big proviso: you have to be sure that you can tolerate that extra risk.
History is littered with impoverished investors who have come unstuck because, in the good times, they took on more risk than was right for them.
What is risk?
Risk comes down to the proportion of shares and property which are in your portfolio, compared to the amount of fixed interest and cash. This is all about getting the right investment mix, called ‘asset allocation’ in the jargon.
The trick with investment is to get the best investment returns for a certain level of risk.
We all want high returns with low risk, but after 40 years as an investor, adviser and financial author, and 40 years of hunting for such an investment, I have never found it.
In fact, I can confidently say that such a paragon of an investment with low risk and high returns doesn’t exist.
The first thing any investor should do is consider how much risk they can tolerate.
If you take on too much risk, in the next major downturn you’ll end up very uncomfortable, and probably sell up at the bottom of the market. If you take on too little risk you’ll miss out on a good bit of return.
You want the ‘goldilocks’ amount of risk, not too hot and not too cold.
Check your risk level
I’d encourage all investors to do a “risk calculator”. There are many of these tools available on-line. Government financial education site www.sorted.org.nz has one and some KiwiSaver providers have them.
They’ll ask you a few questions and then tell you the type of investor you are (conservative, balanced, or growth).
These descriptions are a way of expressing the amount that you should have in each of the main asset classes, that is, your asset allocation.
In essence, these calculators ask questions about things like:
- Your financial capacity, which is your ability to withstand a major economic shock.
- The length of time you’re investing for, because the volatility of shares and listed property mean that they need time to get their better returns, and
- Your psychological makeup. If you worry a lot about your money, you’re more likely to be rattled out of the market in the next slump.
These kinds of questions will establish your risk profile and you need to be very careful before you even think about taking on more risk than your profile suggests.
Once you know your risk tolerance and the asset allocation that you should have, you can start to think about improving your returns within that risk tolerance.
How to improve returns
There are three main ways to improve your returns.
Pick the right shares
First, you can try to improve your investment selection. This means that you try to select the best investments within each asset class, the best securities that will outperform the average. To do this, you’d spend a lot of time reading about and researching high-growth companies and companies that are under-priced compared to their future prospects.
Pick the right industries
Second, you could try to find the right industries and invest in them. For example, you may decide that automation and robotics is an area likely to achieve a lot of growth and, instead of trying to identify specific companies, you could buy funds that are based on these.
Tactical Asset Allocation
Third, you could use ‘tactical asset allocation’. This means that you temporarily tweak the asset allocation that you’ve set according to what you think will happen in the immediate future. For example, you may think shares are very expensive and, with other things that are going on, decide that a recession and market slump is imminent.
In these circumstances, you’d sell down some of your shares to buy fixed-interest investments or hold more cash to wait for a future buying opportunity.
Taking more or less risk is dangerous because predictions are always difficult and you may be stranded with too little or too much exposure to shares, but it can be a very successful means to extra returns.
None of these three things (tactical asset allocation, identifying the best future industries and selecting the best securities) is easy.
There are lots of people trying to do the same as you and for every winner, there’s a loser.
Nevertheless, I think it’s certainly better to do these things rather than just take on more risk permanently – and if you spend the time diligently researching, there’s no reason why you shouldn’t join the winners.
The information contained in this article is general in nature and is not intended to be personalised financial advice. Before making any financial decisions, you should consult a professional financial adviser. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain a regulated financial product. Martin Hawes’ disclosure document can be found at www.martinhawes.com
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