FOR savers and investors, inflation is proving a formidable nemesis. Stock markets have made little progress of late, with the FTSE 100 index not even mustering a 1 per cent rise over the past six months, while the torrid time for savers continues: the Bank of England last week left interest rates on hold at 0.5 per cent for the 27th consecutive month.
Meanwhile, inflation is on the up and still well above the Bank of England's target. Britain suffered the highest rate of inflation in two-and-a-half years in April, with the headline consumer prices index (CPI) rising to 4.5 per cent and the retail prices index (RPI), a far more accurate reflection for most people as it factors in mortgage servicing costs, standing at 5.2 per cent.
Inflation can severely dent your wallet and erode your capital: if it edged up to 6 per cent it would take just 12 years for the value of a pound to drop by half in real terms.
The good news is that there are ways to potentially boost the value of your portfolio without having to invest any extra money. Here are five ways to supercharge your investment returns:
1. Reduce charges
Most investments have initial and ongoing charges. These can eat into performance considerably, especially over time.
The majority of funds marketed to private investors have an initial charge of up to 5.5 per cent, taken straight off your investment. The Jupiter Merlin Income fund, for example, charges 5.25 per cent upfront.
Then there's the annual management charge (AMC), which tends to come in at 1.5 per cent, though it varies depending on the type of investment. Investment trusts are typically cheaper than unit trusts and open-ended investment companies, with AMCs rarely above 1 per cent.
Investment providers review these charges on a regular basis, and so should you if you want to get value for money. While good performance is worth paying for, don't fall into the trap of paying over the odds for inferior performance.
Ask a financial adviser to ascertain charges or get a copy of the fund factsheet. Most are accessible from the fund data provider www.trustnet.com.
Paying too much? Firstly, avoid hopping from one investment to the next: initial charges could more than wipe out any gains.
Changing the way you pay for advice could help too. If you use a fee-based wealth management firm you can often access investments at creation price or net asset value. In most cases this means that the initial charge is waived.
Fee-based advisers don't receive any commission on the products they recommend; if they do, it's passed back to you. You will, of course, have to pay separately for financial advice, but these costs are often lower.
From the end of 2012, the Retail Distribution Review will ban commission from the sale of investment products. In the meantime, if you pay for financial advice the old-style way, make sure you know how much you're forking out.
Your adviser will be paid directly from the investment provider, with commission being included in the charges it takes. It can be confusing to see who is receiving what, but rest assured it's taken from your investment in some way.
Initial commission on individual savings accounts (Isas) and collective investment funds is typically 3 per cent of the sum invested, while investment bonds and some other investment contracts still pay up to 7.5 per cent.
2. Review performance regularly
Most investors don't review their investment performance in a structured way, while others compare performance against the FTSE. In most cases, this is akin to comparing apples with pears.
A more detailed analysis of underlying investments should be undertaken at least once a year to see how the constituents of your portfolio are performing relative to peers and against the investment sector.
Take the L&G UK Growth fund as an example. It has added 12.1 per cent over the past year, but the BlackRock Growth and Recovery fund, which also sits in the UK All Companies sector, has added 39.3 per cent. Both have AMCs of 1.5 per cent. On average, funds in the sector have notched up returns of 21.8 per cent, so the former has grossly underperformed, and the latter grossly outperformed.
Financial advisers are generally paid ongoing commission of 0.5 per cent, known as "trail", or charge ongoing fees, so make sure you receive the regular service you're paying for.
3. Don't lose your balance
As well as reviewing underlying performance, make sure your investments haven't lost their balance.
First, ensure your tolerance to investment risk has been properly evaluated. Being categorised simply as a "low", "balanced" or "high" risk investor is inconclusive and flawed: a more sophisticated risk-profiling tool will yield more accurate results. Multi-asset portfolios help reduce risk by investing in different asset classes that don't perform in the same way at the same time. Make sure you maintain the correct mix of assets so that the risk you're taking doesn't get out of kilter with your tolerance to it.
Research shows that rebalancing reduces volatility and is likely to produce better returns. A balanced portfolio of funds chosen ten years ago would have generated 15 per cent more profit if it was rebalanced to the original proportions each year when compared with a portfolio left untouched, according to Skandia. The rebalanced investment also experienced volatility of 11.6 per cent, the lowest of four scenarios examined.
Some fund supermarket platforms offer automatic rebalancing. You can do it manually by switching funds or asking your financial adviser to do so.4. Re-invest your dividends
The power of compounding (making returns on returns) shouldn't be underestimated, as Barclays Capital's Equity Gilt Study 2011 shows.
The re-investment of dividends is one of the most important determinants of total returns over time. Consider this: 100 invested in the UK stock market in 1899 would have grown to be worth 12,665 in capital terms. With dividends reinvested, that total would be a whopping 1.7 million.
5. Don't pay too much tax
The government is keen to rake in as much tax revenue as possible, but don't pay more than you have to. You can stash up to 10,680 tax-free every year into an Isa, or 21,360 per couple.
Other investments can be tax- efficient too. Dividends paid on collective investments are taxed in the same way as Isa investments: basic rate taxpayers have no further tax liability.
Unlike Isas, the proceeds from investments are liable to capital gains tax (CGT), but you can make gains of up to 10,600, or 21,200 per couple, this year without incurring tax.
A couple investing 250,000 would have to achieve an annual return of 8.48 per cent before they would have to pay CGT on it.
• Jason Hemmings is a partner at Edinburgh-based Cornerstone Asset Management. [email protected]