It’s a peculiarity of the phrase ‘risk and return’ that both concepts are expressed in the singular, rather than the plural. Perhaps if we called it ‘risks and returns’ we’d be more inclined to see things as they are. As a business owner, you deal with many different types of risk – cash flow, conversions, getting tax returns away on time and staying ahead of the competition.
And yet when it comes to our own investments, ‘risk’ still tends to be bundled into a single concept when in fact there are many types of risk, some more obvious than others. While you’re building and maintaining your business, it’s important to keep a close eye on your personal financial situation too. Sometimes the most damaging drains on your returns can come from unexpected sources, things you didn’t even consider to be risks.
In part seven of our guide to balancing your personal and business financial health, we’re looking at the silent killer – costs.
The downside of the long game
“Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy.” – John C. Bogle
When we think about things that can adversely affect the value of our investments, the mind naturally conjures up the risks associated with volatile markets and share prices. If prices take a tumble, the value of our shares will tumble too – it’s the risk we take when we invest, that our investments may lose value. As the disclaimers often tell us, investments can go up or down and you may get back less than you put in.
But the kinds of risk that can really erode your wealth are the ones you may not see coming. They fly under the radar but they can do just as much damage, sometimes more. Among these ‘stealth risks’ you’ll find investment costs. Just as returns compound over the years, so the slow drip-drip of costs can eat up large chunks of your money. To give you an example, over the 20 years to 2014, the markets returned 9.9%. Investors however, received 5.2% per year.
To put that in context, if you invested £1,000,000 in 1994, it would be worth £6,546,380 twenty years later. But the reality is that investors only received £2,750,991 – haemorrhaging money through under-appreciated costs is a serious business.
You can’t avoid costs altogether, but you can keep them low by embracing the adage that time in the market matters more than timing the market. In fact, trying to time the market is a hiding to nothing – you can’t predict what will happen and neither can we, but you can certainly rack up the costs as you go from pillar to post trying to anticipate the next trend. Investing is best carried out by sticking to a long-term plan that’s carefully tailored to what you want to achieve in life.
Where Citywide can help
At Citywide we understand that everything starts with deciding what you want to achieve and building the right plan to get you there. Getting better returns isn’t a goal in itself and without context, without being pegged to something you want to achieve in life, aiming for ‘better returns’ can actually be dangerous. It can see you concentrating on trying to ‘time the market’, racking up the costs as you go, quite apart from the bad decisions those attempts to predict market movements may lead to.
We’re here to build a strategy that will get you where you’re going, keep your costs down, your spirits up and help you stick to your plan, even when it’s not easy.
If you’ve enjoyed reading this part of our guide to keeping your personal and business finances in shape, you can download our full guide, ‘10 actions successful business owners take to grow their personal wealth’ today.