The real impact of investment choices

Alongside uncontrollable factors like market returns, the cumulative impact of all the investment choices you make along the way is what ultimately determines your investment outcome. That's why making good decisions about investment contributions and fees is of the utmost importance.

A year of rolling pandemic lockdowns has provided an entire generation of investors with a dramatic reminder of the value of individual choices.

In particular, those living in Victoria and NSW will never again question the value of being able to choose to meet friends at a pub or restaurant, not having to wear a mask or simply paying a visit family across town or in another state.

Certain lifestyle and career choices - where you have chosen to live, the type of work you do – will always be foundational decisions. And in a pandemic affected world, investment choices may have taken on a different role than normal for some with the industry seeing an influx of first time investors, and greater trading volumes.

At any moment in your investment journey, there are likely a host of factors impacting the performance of investment markets and hence a portfolio exposed to those markets. There is no shortage of interesting product developments, changing economic and political environments and investment market swings to dominate conversations about financial plans.

In investing we have choices and they range from setting a strategic asset allocation, to product selection, to practical choices about how much we invest, how long for, how often we add to it, and what it costs. It is the cumulative impact of all the choices you make along the way, alongside the uncontrollable like market returns, that determines the outcome.

First the good news.

Looking back over the past 25 years, investment markets have been generous and rewarded disciplined long-term investors with strong returns. Vanguard recently took a look back at how an investor would have fared if they had invested $50,000 in 1996 and the impact certain choices would have made over this time. Here's what we found.

If our investor had chosen an investment carrying an industry average fee (0.85%) and chosen to contribute to that investment at a rate of 1% of their salary annually, they would have ended up with $474,211.

In a sliding doors moment, had that same investor initially chosen a product with the same investment proposition, but with a lower investment fee of 0.29%, they would instead have ended up with a balance of $537,831 - a 13.4% increase.

Had they made the choice to increase contributions to 4% of their salary annually, they would have grown their investment value to $731,533 after 25 years, a 54.3% increase.

Had they done both – chosen a lower cost investment and increased their contributions, their investment would have grown to $816,035, nearly double that of the base scenario.

The modelling also highlighted the long-term financial pain of being panicked by a market event and withdrawing for a period of time. It showed that the 25-year investor reacting to a market contraction after the initial five years, switching to cash and then subsequently reinvesting, would have been $121,000 worse off than if they remained disciplined and stayed the course throughout the market volatility.

The same market factors were at play but outcomes experienced were vastly different based on the choices made.

Now for the more sobering side of the equation – what the future may hold.

Long-term scenarios like these are very sensitive to variations in the return assumptions. For the historical case the return used was 9.45% for a 70/30 growth/income portfolio. Looking forward the return assumption is a more muted 6% based on Rice Warners' Expected Investment Returns of Asset Classes 2020 report.

Projecting forward for the next 25 years using an annualised return of just over 6% the outcome of the lower cost, high contributions scenario would yield $407,691 after 25 years.

That is about half what the previous 25 years has yielded, and is a timely reminder that we may not be able to rely on historical high returns as seen by superannuation portfolios with double digit returns over the last decade.

You may choose to ignore the more muted forecasts and plug in the higher historical average returns into your financial plan. You could alter your asset allocation to take on more risk in the portfolio or you could choose to save more (and spend less today) or accept a lower level of savings in retirement.

It all comes down to choices.



Robin Bowerman

23 Nov, 2021


Any advice contained in this website is of a general nature only and does not take into account your circumstances or needs. You must decide if this information is suitable to your personal situation or seek advice.

Rolanda has been my financial adviser for 20 years. I have always found her to be highly intelligent, knowledgeable and professional in her career. Rolanda is accessible at all times and patiently explains terms that I do not fully understand. I can highly recommend Rolanda and it is a pleasure to do so. I do this with the utmost confidence. Marcia Montgomery (Retiree – home duties and ex-clerk with Water Board)
I retired Oct 2012, and seeking Financial Advice for my retirement funds, I decided to have Rolanda look after my financial affairs, and so happy I did. Since my retirement I am extremely comfortable with Rolanda’s advice, experience and strategies and the returns on my investments. Rolanda is my "Breath of Fresh Air" at this stage of my life and she makes herself available 24/7 should you need to talk with her. Steve Hoad (Ground Engineer, Qantas)
In 1997 I left Energy Australia and decided to join Rolanda Adams Financial Services for the financial support and advice that I would need into the future. That decision has proved a very good one and I am still with Rolanda who has given me advice and friendship over those many years. The advice given has ensured that my investments have been protected and the major losses, of some, during the GFC was not felt by me unduly. Rolanda and her team are very easy to contact at any time and one is always received in a most professional manner. I would be most happy to recommend Rolanda Adams Financial Services to all who need financial services. Graham Fleeton (Manager, Property Insurance Group Energy Australia (Ausgrid))
Rolanda has been my Adviser for the past 18 years. Through her wide industry experience and professional expertise she has ensured the sound development and ongoing management of my investments. Her advice has invariably been sound, timely and entirely tuned to meet my personal needs in retirement. She has a friendly, engaging manner and is always readily available to address any of my concerns. I have no hesitation in recommending her. Neil O'Keeffe (Chief Inspector (retired), Australian Customs Service)

© 2022 Rolanda Adams Financial Services Pty Ltd. All rights reserved. Site by PlannerWeb.