Published on: May 16, 2013
Categories – DIY Investment
A guest post from Nutmeg, the online investment company establishes six very sound principles to help people become better investors:
Before investing it is important to assess your comfortable level of risk. As with most things in life, for rewards there must be risk; therefore it is important to take time to work out the level of risk you are comfortable with. Assets that yield the highest potential return are the riskiest, but these are not for everyone. A lower returning investment yields less potential reward but the overall risk is significantly lower. You must find your own personal comfort level before beginning investing.
As the saying goes, don’t put all your eggs in one basket. It is important to diversify your investments; this can be through asset classes, geography or sector. Investing only in one equity increases the risk of your investment: by investing across a number of markets and industries this significant reduces the risk and, if done correctly, will not reduce the return potential.
It is common for new investors to jump in and out of the market due to fear or lack of preparation. Data collected shows the benefit of continuous investment over a number of years, compared with dipping in and out over the same period.
By diversifying your investment across a number of markets you have reduced your risk but it is also important to remain in control of the funds. Rebalancing and reinvestment is important to achieve the maximum return from your investment. The example above shows the benefit of rebalancing over leaving the fund to work by itself.
As the titles above suggest, a passive fund is bought and left to its own devices and an active fund is managed and requires constant attention to ensure it is working and beating the market. An active fund pays a higher charge percentage than a passive fund and so the cost is greater.
ISAs are a flexible, tax-efficient way to supplement your savings. You can shelter up to £11,520 this tax year and, if you continue this over a number of years, it will allow you to build up a significant portfolio of tax free investments.
Other benefits of putting your money into an ISA include: there is no tax to pay on capital gains; there is no further tax to pay on income; you can have access and withdraw your capital at any time.
Published on: May 15, 2013
Categories – DIY Investment
It was probably this morning`s unrelenting drizzle that led me towards the abyss of a retirement pension stock-take. I should have opted for a rain check.
In the dystopian savings world of the pre-consolidation 1980s, there was one heck of a choice when it came to pensions. Financial companies thrived under the lazy eye of self-regulation, while product of questionable quality was pushed out to not-so-cynical consumers.
Many of those enterprises have since become as redundant as the Sinclair C5, including of course Equitable Life which, at its peak, was attracting £1 out of every £6 spent on pensions in this country. The list of enduring players still around today is not particularly long, but includes the likes of Prudential, Norwich Union (Aviva), Scottish Widows and Standard Life.
It was to one of those companies, Scottish Widows, that I decided to entrust part of my future retirement wealth back in the 1980s. The word “wealth” would have been highly appropriate based on the 13 per cent per annum growth illustrations of a quarter of a century ago. But this isn`t yet another piece about misleading pension projections.
Nor am I about to have a direct gripe about fund performance, although I might be justified in doing so. Even with reinvested commission, the Scottish Widows` Pension Equity Fund managed to turn £4,000 into only £5,038 by May 2012. Okay, the FTSE 100 had been pretty flat during the period in question, but a more significant contribution from dividends might reasonably have been expected.
No, my gripe is about the Scottish Widows` With Profits fund, and in particular its relationship to Guaranteed Annuity Rates. It is clear from my Annual Bonus Notices that everything was going swimmingly from 1988 until 2002, with new (albeit diminishing) bonuses being added to the basic sum assured under my policy. So far so good – that was exactly how “smoothing” of returns should work: pay out some of the profits annually and retain some for potential distribution as terminal bonus (unless of course the revised interpretation of smoothing is that your With Profits policy value will stay level in perpetuity).
The thing is that my investment now appears to be broken and in need of urgent repair. The total guaranteed policy benefit as of 31 December 2002 amounted to £20,970.03 and, more than ten years on, had advanced to – yes you`ve got it – £20,970.03.
The party line will of course be that it has no longer been appropriate to distribute bonuses annually, even at the level of gilt yields as, in this way, fund managers can retain essential investment flexibility for the benefit of all With Profits policyholders and maximise long term returns from equity holdings – which may (or may not) eventually be translated into a terminal bonus payout. That`s a comfort.
What the company is saying is, granted, I may have so far invested about £14,000, with the prospect of this rising to £17,000 by the age of 60, but we still can`t see our way to improving the basic guaranteed policy benefits from £20,970.03. (Possibly) jam tomorrow. I wonder why.
Is it feasible that the decision to rein back on regular bonus distributions has been influenced by policy provision 3.4, which generously provides me with a Guaranteed Annuity Rate for life of 9.804% (almost twice much as the current going rate)? If so, I detect a whiff of cross-subsidy going on here.
Readers may recall that the Equitable Life`s 238 year trading existence effectively came to an end around the beginning of this century – a company brought to its knees by unaffordable Guaranteed Annuity Rate clauses within its pension policies.
Perhaps if, like others, the Equitable had been more astute and simply ceased adding bonuses to its policies it could have been around today.
In the meantime, we`ll just throw a widow`s cloak over past events and hope to do better in the future.
Published on: May 9, 2013
Categories – DIY Investment
A number of press articles over the last week suggest that rumours of the demise of financial advisers are premature:
“Advisers report post-RDR influx of new-to-advice clients” (F T Adviser)
“Advisers in demand despite upfront fees” (Holly Thomas, The Sunday Times)
So, can we deduce from this that consumers have finally seen the light and acknowledged the merits of intermediation? Possibly, though unlikely. An analysis of the data behind these headlines suggests that the numbers are, as yet at least, not sufficiently compelling to mark a sea change.
In the former case, it was maintained that “statistics suggest that the predicted migration from independent advice in the wake of fee transparency simply has not occurred” and that there was no evidence to support “assertions that DIY investing is booming”. Interesting.
The basis of this claim rested on a survey of 223 IFAs by VouchedFor, which found that 97 per cent had taken on new clients this year, of whom 40% were new to the advisory sector. In addition, 38 per cent of the advisers acquiring new clients stated they had taken on more in Q1 2013 than in the corresponding first quarter of 2012.
My first thought was that VouchedFor is a website which exists to rate financial advisers. No advisers, no website.
Second, it would indeed be surprising if a financial adviser had not managed to take on at least one new client over a period of three months.
Third, 40% of clients may have been new to the financial adviser sector – but how many others chose to paddle their own canoes?
Fourth, by extension, 62% of the advisers acquiring new clients took on more business in the first quarter of last year than in the corresponding period this year.
True, the Retail Distribution Review has contributed to the standing and legitimacy of financial advisers in the eyes of the public, but to conclude we are about to witness “an unprecedented influx of new clients looking for advice” may be stretching the elastic a tad. Not too much mention here of Deloitte`s confident estimate that as many as five million people will stop using financial advisers because of upfront fees.
Similarly, the piece in the The Sunday Times made reference to research carried out by the website, Unbiased.co.uk – which helps the public to find advisers in their local area and, therefore, is another site whose existence is predicated on the survival of a healthy sector. More helpfully, Unbiased found that there had been “a 9% increase in people searching for an adviser between January and April compared with the same period last year.”
Now, on the surface of things, that is welcome news for advisers but, wait a minute, hasn`t the advisory sector already reduced by around 90% and is currently on track to bear out Ernst & Young`s prediction of a further fall of 3,000 in numbers to 20,000 this year? Would it be beyond the realms of possibility to suggest that this increase in searches was heavily influenced by newly-orphaned clients who do not have the confidence to go it alone? A round dance in ever decreasing circles, as it were.
Such noise in the environment is but a rodent squeak among the cacaphony of mouse-clicking self-directed investors who, according to the FT (7 May 2013), “are starting to redefine the competitive landscape, as platforms vie for a greater share of the online market”. Millions of consumers already make their own decisions with the help of fund supermarkets, such as Hargreaves Lansdown, Bestinvest and Fidelity. In the last quarter to 31 March alone, net fund inflows reached a record £1.8 billion for Hargreaves Lansdown. The interesting thing to see is how well these companies will all fare when “clean pricing” is forced upon them from next year and consumers finally come to recognise what their true margins are.
I use the term “self-directed” deliberately here. The debate to date has not been helped by defining financial planning as a stark choice between DIY investing and full advice. Whilst financial advisers have been somewhat introspectively “segmenting their client banks” and “re-defining their service propositions”, consumers have, almost imperceptibly, been changing their own game. What has evolved over the last twelve months has been a move to “do more yourself”, as prospective investors pursue a modified DIY approach and take advantage of the growing array of financial planning tools available at little or no cost on the web.
That these “inbetweeners” are actively engaging in a financial planning process is to be encouraged and will, in time, lead to a greater appreciation of the technical input available from well-qualified advisers. As in all spheres, intellectual capital is worth paying for. A word to the wise though: any advisers basing their business plan on hourly fees in return for completing fact finds, assessing client risk profiles and producing cash flow projections may well have to re-think their propositions.
Published on: April 9, 2013
Categories – DIY Investment
It`s definitely time well spent taking a look at the online documentary produced by Sensible Investing, called, “Passive Investing: The Evidence” - featuring William Bernstein, John Bogle, Cass Business School, Moneyweek, etc.
Published on: March 23, 2013
Categories – DIY Investment
I learnt something new this week.
Apparently, according to one leading external asset manager: “The DIY investor should put in ten hours a week to obtain performance above inflation”. And, if that were not enough, “… even the retail investor (employee in a work pension) needs a couple of hours a week on their asset allocation.”
It seems shock tactics are becoming the new norm when impressing the need for a service upon the public. After all, it was only a few weeks ago that Moneyweek (which I normally have a lot of time for) was telling me that I was going to hell in a handcart with everyone else unless I took advantage of their next three free issues setting out my salvation.
But ten hours – really? Could this possibly be a case of talking up one`s book?
Let`s just take a moment to analyse what sensible DIY investors should be doing:
- plan your cash flow requirements
- be comfortable that debt repayment, rather than investment, does not actually represent the best option
- establish your attitude to, and capacity for, risk
- be confident that you are prepared to invest in real assets for a period of 5 to 10 years plus
- take up asset positions which correspond to your risk profile
- enter into those asset positions gradually over a period of 12 – 24 months
- use index-trackers as part of your core portfolio in order to minimise charges
- re-balance your portfolio on an annual basis to maintain its original integrity
- re-visit and “sense-test” your risk profile every two or three years.
It`s fair to say that many of the tools to facilitate this methodology are already available at little or no cost on the internet. The only thing a DIY investor should be paying for is intellectual capital, as provided by a well-qualified financial planner, at the time when it is becomes evident that specific technical input is required. Let me be clear, I am not one who believes that financial advisers service clients in the same way that Bonnie and Clyde serviced banks. Advisers have markedly upped their game and can provide valuable knowledge to investors in technical areas. The question is at what point are they needed? When assessing the merits of a pension transfer or creating a trust? – almost certainly. When assembling your personal and financial data, gauging your risk profile and creating an investment portfolio for medium/long term growth? – probably not.
While accepting that I am an uncomplicated soul who may be glossing over some of the subtler nuances of investment planning, I maintain that if investors adhered to the principles set out above and refrained from too much tinkering (remember Claudio Ranieri quickly lost his job for this), they should not go too far wrong.
Unless of course, we are talking about rewarding an expert to beat the market on a consistent basis. Now that would certainly be worth paying for. However, here I am on the side of Terry Smith (CEO of Tullett Prebon and Fundsmith) – namely that: “there are only two types of investors – those who know they can`t make money from market-timing, and those who don`t know that they can`t”. Or, as John Authers recently wrote in his regular FT column: ” there is simply too strong a tendency for market-timers to miss out on periods of recovery.”
So, let`s just keep things shrouded in mystique for as long as possible, shall we?. That way, the status quo won`t be rocked and financial advisers` income levels can remain intact. Rather than spend two hours per week in futile DIY pursuits, you can ask a professional to do this complex investment planning for you. At an average rate of £165 per hour, this would work out at only £17,160 per annum. Where do I sign?
More seriously, it is important to part with fees out of your hard-earned taxed income only where demonstrable value can be added by a financial planner. This does not include “beating the market” because, eventually, you can rest assured that the market will beat your adviser. And it may not be all that valuable to engage in sub-optimal eight question psychometric tests which, along with an intermediary`s subjective input, miraculously conclude that you are a “Balanced” investor (and therefore you really should know what awaits you with over 60% of your portfolio allocated to stock market investments).
In short, do your homework and become engaged in the process of financial planning. Why should you delight in saving £500 off the price of a car, yet not bat an eyelid at losing thousands of pounds off the top of your investments? Excessively profitable intermediation thrives on consumer inertia. True, cost is not everything, but it is nonetheless a very significant factor. I will therefore conclude by returning to the words of John Authers:
“There is at least one guarantee in investment, which is the fee you are charged. The less you pay to intermediaries and managers, the better your investment will perform.”
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