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K.I.C.S. (Keep It Complicated, Stupid)

K.I.C.S. (Keep It Complicated, Stupid)

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.”

Money-Guidance
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