| Clients |
Robert and Melissa |
| Situation |
Managed their own portfolio of investments valued at approximately $200,000. They were active investors who constantly traded their investments and speculated on the latest hot stocks and highly rated managed funds. |
| Problem |
Their investment returns were going nowhere. |
| Solution |
Financial planner explained the following:
- Predicting markets, companies and investment returns is unnecessary and nearly impossible.
- Every trade incurs costs, and each time an individual or managed fund sells an investment, this potentially triggers a new tax liability. These costs place a significant drag on investment returns over the long term.
- Investors should consider the latest academic research to support their investment approach, rather than market hype and speculation.
- Costs are important – high fees charged by product providers and fund managers can substantially erode net returns over the long term.
- There are numerous benefits to be attained from diversification.
Robert and Melissa agreed to adopt a more balanced and disciplined investment approach for half of their investments ($100,000) and continue their current trading and speculation with the remaining $100,000. |
| Outcome |
Over the next ten years, Robert and Melissa’s actively traded portfolio had larger fluctuations in value, although in the end, they both achieved the same return of 8% per annum. Upon further analysis, the active portfolio incurred additional costs of 0.5% per annum and capital gains tax was payable when each profitable investment was sold. |