The marginal gains theory suggests that it is easier to make 100 changes that improve something by 1% per change, than to make one change, which improves something by 100% on its own.
You may remember that the most memorable recent application of marginal gains was in athletics and in particular cycling, where the theory was popularised by Sir David Brailsford and the Great British cycling team.
Brailsford’s marginal gains approach was to break down everything that went into riding a bike to its smallest components and analyse individually how the cycling team might be able to improve that element.
Alcohol was rubbed onto wheels to improve grip, which meant riders could take corners that little bit faster. Riders were asked to wear electrically heated shorts, which kept their muscles at an ideal temperature for longer, thus improving energy transfer from the rider to the wheels. Hotel rooms were made darker and cooler, conditions under which better sleep is more likely, improving the cyclist’s chances of a restful night and recovered muscles in the morning.
The financial affairs of business owners are very much like a professional level road bike and championship rider.
There is a huge amount of interconnected, moving parts, which, broken down, contribute to your overall wealth and, ultimately, your financial wellbeing and financial freedom.
The job of a financial adviser is sometimes to make sure that every possible marginal gain is being looked at and used in a way that benefits you and your finances. Individually, each gain may not be worth that much and, certainly, the drain on your time would be immense to look at each one. But, taken together and approached with our expertise, each element has the potential to make a huge difference over your time working with us.
Let’s look at a couple of examples of how this approach can help your finances to grow and fund your ideal financial future.
Investment charges
A 1.5% charge on your investments may not seem like much, but we pay attention to all of the ‘small’ – or even, marginal – investment charges that your investments incur, because over time they can add up dramatically.
Let’s say your bank charges you 1.5% per investment made and 0.5% annually to use the bank’s investment platform. There’s then also an annual charge of 1% and a management fee of 1%. All of a sudden your total investment fees are 2.5% annually and 1.5% each time you invest.
If you start out with £250,000 to invest, then in year one, your charges would be £10,000. We would need to look at what those investments were returning for you each year and how much you wanted to invest annually, but let’s say we could find a saving of just 1% annually on your charges. Instead of a £10,000 cost of investment, your investment would cost £7,500, a saving of £2,500.
That might not sound like a huge amount in the grand scheme of things, but that’s already near to the cost of a 10-day all inclusive holiday to Europe for a family of four.
And, remember, we’re talking about lots of marginal gains here, that add up to make a big difference. We’re also, in the case of investment charges, talking about something that repeats year-on-year.
Let’s look at another common ‘marginal gains’ example we often speak to clients about.
Compound interest
Compound interest is the notion of earning interest on top of interest, over a period of time.
Let’s say you place £250,000 into an investment account which achieves 4% average annual returns. That means that, in year one, your £250,000 would be worth £260,000, assuming the investments return their annual average. You would make £10,000.
If the account returned the same amount each year for 20 years (still a shorter term than a typical long-term investment), then your total return would be £200,000 and you would now have £450,000 sitting in your account.
But this is assuming that you (or your adviser) has not ensured you’ve taken advantage of compound interest. To earn interest on the interest, you would have re-invested the £10,000 you made back into the account in year one, giving you £260,000 to earn interest on in year two. If the account continues to perform at its average 4% return, you would make £10,400 in the second year of the account. That’s already £400 more than if you just pocketed the £10,000 return from the first year into cash and carried on with your £250,000 investment.
How much difference does this marginal gain make by year 20?
Assuming you reinvested your returns each year, earning compound interest each time, and the account continued to return its average 4%, your £250,000 would have turned into almost £550,000 in year 20. That’s nearly £100,000 more than if you had not taken advantage of compound interest.
That’s quite some ‘marginal’ gain and exactly why we think business owners can benefit from a thorough analysis of their finances, looking for every possible opportunity to optimise and ensure your money is working as hard as possible for you and your desired lifestyle.
