This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
When you put money into shares, bonds or real estate, what kind of return on investment (ROI) can be realistically expected? Moreover, what kinds of forces can eat into your returns – notably, fees and taxes? Below, our financial planning team at WMM here in Oxfordshire tackles these questions in more detail. We hope you find this useful and invite you to contact us if you’d like to discuss your own investment strategy.
What are “realistic” returns?
Investment returns vary depending on the asset you are investing in, the time horizon you want to invest for and the fund in question. As a starting point, it is reasonable to expect bonds – such as gilts (UK government bonds) – to deliver a lower return than equities (stocks & shares) over a long period of time. This is because high-quality bonds such as gilts present much lower risk to investors since the bond issuer is very likely to pay you back – with interest – after borrowing the money. Equities, however, present a higher risk of losing money since the company in question may fail. Yet the potential for growth is also greater; so, if the company you invest in does well, then the reward could be greater.
Let’s run a comparison, briefly, in 2021-22. At the time of writing, a “good” interest rate from a regular savings account (fixed rate) is about 2%. For longer-term UK government bonds (say, 10-year gilts), the annual return is closer to 5-6%. Stocks and shares, however, can do much better. The S&P 500, for instance, has delivered an average annual return of 10-11% (between 1973-2020) – although with considerable market volatility along the way.
How to protect your returns
Looking at this comparison, it would be easy to assume that investing in stocks & shares would be the best option for everyone. Yet this is not necessarily the case. For instance, if you plan to retire in the next few years, you may wish to invest more in “less risky” asset classes such as bonds – to protect your portfolio in case of a stock market crash. If you already have enough to cover your retirement costs, then your main goal may be wealth preservation as you finish your career – not wealth generation, which is usually the goal earlier on in your life.
In other words, your investment strategy is important for protecting your investments returns. Yet there are other, less-well-known forces that can undermine any investor’s portfolio if he/she is not careful. In particular:
- Inflation. This refers to the rising cost of living – i.e. goods and services – within a period of time. Inflation is often referred to as the “silent killer” of investments, since it erodes the spending power of your money. For instance, if inflation rises 2% per year and your cash savings only grow 1% per year, then in real terms you are losing 1% each year. As such, investors should typically aim to at least match inflation with their investments over the long term – to preserve the real value of their capital.
- Taxes. There is usually a government waiting nearby to tax any wealth that is generated via investments! These, of course, eat into your returns. Fortunately, a UK investor can use a range of tax-efficient vehicles to mitigate the impact – such as an ISA and/or pensions. A financial adviser can help you reduce needless taxes.
- Fees. If you invest via an online platform and into funds, then you will be charged for this (unlike cash in a bank account). This is inevitable when you invest, but some funds and providers are more expensive than others – often unjustifiably so. Our financial Planners can help you navigate different options and find good value for money.
Invitation
Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM.
You can call us on 01869 331469
