While most investors are focused on finding the best to stocks to invest in and how to perfectly time the market, there is a small handful of steps that all investors can take to improve their returns.
Certainly, finding the most appealing stocks and knowing when to buy and sell are hugely important, but these four simple steps could prove to be very useful weapons in any investor’s arsenal.
Use Aggregated Orders
While the cost of sharedealing has fallen hugely since the birth of the internet, for many investors the cost of each trade is significant and leads to them under-diversifying. Certainly, £12-£15 per trade may not seem like much if you’re investing large sums, but a private investor building a portfolio of say 25 stocks could be forking out as much as £375 in dealing costs alone.
One way to reduce this cost and still buy a wide range of stocks is to use aggregated orders. This is where the sharedealing company aggregates your order with those of other customers to create one large order that it executes at a lower price – usually around £2 per customer per trade.
The downside is that you can only trade on specific dates (usually one day per week), but with a potential saving of up to £13 per trade, many investors could benefit from using this service.
Beware Of Inactivity Fees
Many sharedealing companies charge so-called ‘inactivity fees’ which are levied on customers who do not conduct a minimum number of trades each month or quarter. They are normally less than the cost of one trade, which may not sound so significant, however in the long run they can have a negative impact on your returns.
For example, say you have a portfolio valued at £10,000 and are charged an ‘inactivity fee’ of £10 per quarter. Over the course of ten years you would pay £400 in fees, which equates to around one year’s worth of dividends from a typical portfolio of that size.
Of course, not all sharedealing companies charge ‘inactivity fees’, so it may be worth looking round for one that doesn’t.
Use Your ISA
While using an ISA may not save you much in the short run, in the long run it can save you a significant amount in capital gains tax. While you have an annual capital gains tax allowance of £11,000, anything above this is taxed at 18% or 28% depending on whether you are a higher rate tax payer or not. However, with an ISA you can make all the gains you like and will never pay any capital gains. And, for married couples, you can each have an ISA, thereby making them even more appealing in the long run.
Become A Buy-And-Hold Investor
Although buying shares and holding them for many years may not seem particularly exciting, it has proven to be the most reliable means for time-poor private investors to make a return from the stock market. Certainly, trading may work for some people who can afford to dedicate many hours each day to studying price movements, but for private investors who already have a full-time job, buy and hold seems to be the most effective means of maximising returns.
And, if that isn’t enough of a reason to buy and hold stocks, it also significantly reduces overall dealing costs and saves you a great deal of time which can be spent elsewhere.