If you want to be able to generate a decent amount of passive income from your investment portfolio then there is no doubt that the bigger it is, the better right? Well then how can we really grow this portfolio? Whether your aim is to live off the dividends of your portfolio, or whether you are saving and investing for retirement, there are some fundamental factors to be considered when trying to grow your portfolio. In this post, we explore the most effective concepts, strategies and mechanical ways for individuals to do this.
Ok, let us get straight to the point. Your portfolio is going to grow the more you put in it. This sounds very simple and so straightforward but you will be surprised how many people if asked ‘what is the best way to grow your fund’ will answer with just ‘performance’. Many people are much more concerned about how well their stocks, shares and other assets PERFORM in their portfolio rather than actually sticking money in it in the first place. This, in my opinion, is NOT the only important thing and in fact, but in fact your ability and willingness to contribute towards your pot, feeding it with healthy, consistent inflows. This is AS LONG AS you do not make negative returns. We talk about performance a bit more down below, so keep reading.
Right, so if this is not your first time reading about concepts of investing, you most likely have already come across the phrase ‘compound interest’. Simply put as your portfolio gets bigger, the bigger it gets, the bigger it gets. Sounds like a mouthful and a bit overwhelming right. Well, I guess this is why our dear friend alert Einstein called the concept of compound interest the 8th wonder of the world. Those who understand it earn it and those who do not, pay it. The latter part of this can be used to describe why consumer debt can be so dangerous when the consumer does not pay back the principle loan sooner than later. We will explore this in another post. #
Let us assume Amelia invests £10,000 at the age of 20, she sets up a direct deposit to consistently invest £100 a month, and was able to achieve 8% return on average. By the time she turns 57 her account would have grown to just over £425k. It is only an example but I have used the age of 57 to depict the age for which millennials will be able to withdraw from the pension pot. Be mindful that when I say investment portfolio this could be any type of account including ISA’s and general dealing accounts.
Now imagine her aunty Barbra only started investing at 40, and to adjust for the fact that she is double in age, she doubles the initial capital to £20,000. She even doubles the monthly direct debit to 200. What will his pot be worth at the age of 57 if he achieves exactly the same returns? When we do the calculation, you will find that he would have had a pot of just below £160k.
So what judgement can we derive from these simple examples, well first and foremost, the earlier you start investing the better, actually, the earlier you start investing the MUCH BETTER. In this example, even if you doubled your initial capital and your monthly investments you still won’t make up to half of what you would have made if you started earlier with half the amounts. For this reason, time in the market is extremely important.
Now we move unto every investor’s favourite topic. Performance! Of course, you want the performance of your investments to do well in order to really generate that growth of your investments. Whist earlier It sounded like I was having a little go and people who are so fascinated on performance I must stress that performance becomes the most important thing on the downside. What does this means Jacques you may say? Well, everything that I have mentioned so far can only really work if you are generating a positive return and if not, well then you are heading in negatively wrong direction very fast. You want to be able to achieve positive returns on average This means yes, some months, some days and even some years your portfolio may experience a period of negative returns BUT the most important this is to have positive returns on average. The stock market over the past 100 years have generated positive returns thus making all the other parameters the key drivers of how big your portfolio gets. Now it is extremely difficult to beat the market as an active investor but if you can do this, then this will really boost your ability to grow your portfolio. We spoke about time above, well; the younger you are the more risk you can take right? The more risk you take the higher the potential reward.
4. Fees & charges.
OK, so we have spoken about 3 factors that you really need to consider and grow in order to boost the size of your investment portfolio. Now let us looks at factors that can hurt your portfolio size over time, we will start with fees and charges. The same ways we spoke about our best friend compound interest being a massive helping hand in generating a large portfolio, we cannot forget that compound interest still pays a part of the downside too. Fees and charges may sometimes come across as small but over the long period, damn, it has a detrimental impact on your portfolio. We cannot turn a blind eye to these negative contributors to our portfolio.
5. Withdraws Outflows
The fifth and final category is very similar to the first category and it’s all about how much you take out of your portfolio and how often. Very easy to understand, if you want your investment portfolio to grow you should not be pulling out money, let alone on a consistent basis. This will contaminate the power of compounding and in fact, if you were to ask me I would say you should always be reinvesting your profits back into assets to really accelerate the impact of compounding.
Bonus: I want to add that Tax also has a negative impact on your portfolio if you are investing in a normal general account. You probably want to take advantage of all tax efficient accounts such as your SIPP and ISA accounts first and if you we are talking about physical property then consider investing through an SPV.
Growing you investment portfolio regardless of type usually requires a good long time horizon, positive returns on average, strong savings and contribution rates as well as minimal fees and charges. Ideally you will not withdraw from your portfolio until you are ready to retire or step into financial freedom. Until then you may want to consider reinvesting all income and dividends, really allowing compound interest to work hard for you.
" Your investment portfolio is your baby, treat it with tender and care, feed it and protect it and it will take care of you in the future" - Jacques Opoku