What makes the biggest impact?

As you know, we give you plain-speaking investment advice that’s straight down the line.

Here’s the fact of the matter… The thing that makes the biggest impact on investment returns is cost. And what costs the most? Alpha.

What’s Alpha?

Investors used to imagine that all they needed was an active fund manager who knows the secret of how to outperform the market. Those returns are known as Alpha – however, they account for 70% of the cost and only 10% of the return.

  • Professional investors might chase Alpha – they are managing billions of dollars. If they invest £10 billion and get 0.01% annual return, it equates to an extra £1 million per year
  • Ordinary investors (like our clients) just don’t need it. For every £100,000 they invest, the same annual return will earn them just £10 per year – but it will cost them a lot more

But how many fund managers have earned alpha (net of fees) over a long period of time? Very few. Please refer back to this article Active fund management is not the Holy Grail

“Pull your finger out and ignore Alpha! You just don’t need it.”
Lance Baron

What’s Beta?

However, there is the risk that you underperform the market if you chase Alpha.

A couple of decades ago, it became apparent that most of the return is based on the performance of the whole market, not any individual fund manager. Those returns are known as Beta – and Beta accounts for only 10% of the costs.

What are Factors?

The latest research shows that other Factors such as smaller companies and value companies also contribute a proportion of returns.

You might remember our previous article on this subject: Investing that’s as easy as A,B…F

What this means to you

  • Save as much as you can afford for as long as you possibly can
  • Let us recommend a portfolio of diversified low-cost funds that match your risk profile
  • Invite us to review your portfolio at least once a year to rebalance it if necessary
  • Sit back and wait for your returns to roll in

If you have any questions, just ask. We’ll be happy to help.

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100