Can I ask you a (fairly) personal question? Forgive me if it’s too early in the morning for this, but what’s your investment philosophy?
You know, the beliefs behind the decisions you make about investments. I’m asking specifically about stock market investment, whether that’s directly through a stockbroker or via a life company.
Do you, for example, look out for ‘next big thing’ so that you can catch it on the way up and sell at its peak? Are you a disciple of Warren Buffet, always on the lookout for undervalued stocks? Or are you in this for the long haul, clear about your time horizons and happy to sit tight through bear and bull markets because your portfolio is as diversified as it can get? Because you know, based on empirical evidence, that you’ll achieve the return you need just when you need it.
If you’re honestly not sure what your philosophy is, ask yourself this: does your financial adviser know? Does he/she even care what it is?
Look, most of us don’t get too involved – we choose a fund based on a risk rating and let the life company take care of it after that. For a price.
You are probably paying huge fees – somewhere between 1.5% and 2.5% of your money every year is huge – to a series of intermediaries in the financial services industry who care not a jot about your philosophy, because the dominant approach – and, until relatively recently, the only approach – is active fund management. A fund manager takes positions that differ from the market mood, buying and selling shares in an effort to create a return for the investors.
Yes, it’s an approach that covers many philosophies, but they all have one thing in common – a belief in the ability of the superhero fund manager to consistently make a return by second guessing where the market is going.
Over 20 years a passively managed fund could yield a 44% better return
Not that there haven’t been spectacular successes. In the short-to-medium term, the returns can be high. But what about the longer term? Check this out: a report published by the City of London regulator in November 2016 that said that the majority of actively managed funds do not beat their benchmark after fees. The Financial Conduct Authority estimated that an investment of €20,000 in a passively managed fund tracking the FTSE 100 All-Share Index for 20 years could yield a return 44% larger than an actively managed equivalent. 44%!
You have to ‘opt out’ of active management
So it’s a potentially expensive approach with lower returns. Worse than that: until very recently, it’s the only approach. The industry doesn’t really give you a choice. You have to ‘opt out’ of active management. It’s the default setting.
But things are changing.
Weatherby’s, a private bank in London associated with the horse racing industry for centuries, is the first British private bank to come out against active management. This is big.
But for a stalwart of British private banking to actually adopt a ‘house view’ that active investment does not offer value to its multi-millionaire clients is an important development.
Weatherby’s conducted a review of its investment strategy and found that there is a problem with this model. Yes, there is the net profit issue where high fees, along with the capital gains tax that an investor must pay on profits of trading, can actually erode any return the actively managed fund might have made.
But the review also revealed something much more interesting: that its clients would appreciate – and be prepared to pay for – a relationship with a personal wealth manager who is focused on the client’s own assets – rather than a fund manager who isn’t driven by any one investor’s objectives, but has an abstract goal – to beat the market.
Weatherby’s has decided that a passive approach to investment coupled with a personal wealth manager offers the best value to its multi-millionaire clients.
So, picture this: you can get a guy on your side, who shares your investment philosophy, understands your objectives, and can work with you to create a certain outcome. Your money earns more over time because your ROI is not being eroded by fees. If it’s good enough for Weatherby’s multi-millionaire clients, is this something you could get behind as well?
I’m happy to have a chat to you anytime about devising your own investment philosophy. Designing the future you starts here.