In numerous previous posts, I’ve written about my preference for income-generating investments, but I’m aware that not everyone has the time (or interest) to actively manage their portfolio. Earlier this month, I was approached by a London-based wealth manager who was pitching for my business. They offered to conduct an initial review (with recommendations) for £2000, followed by a smaller ongoing fee to review the portfolio and provide regular advice. Needless to say that when I looked at my own performance against theirs, I wasn’t really convinced of the need to fork over several thousand pounds. To me, it seems inherently obvious that if your portfolio grows by 5% a year but you pay fees worth 3%, that you might as well just have put your money in a bond pay 2% and saved yourself the stress of being invested in the market.
I’ve spent a lot of time reviewing investment trusts, funds, individual shares and private placements, looking for certain features and numbers which guide my thinking. For individual shares or private placements, the running costs tend to be negligible, but for mutual funds, index trackers, investment trusts and active funds, I’ve seen charges levied of nearly 10% when accounting for purchase costs, management costs, holding costs and performance costs.
To me, an investment charging above 1.5% is unlikely to be worth the costs, but I prefer to keep my costs to less than 1% wherever possible. A well-established provider of low-cost funds is Vanguard Asset Management, who specialise in providing a wide range of low-cost funds for both institutional and private investors. If you’re unsure where to get started with your investment portfolio, you could do a lot worse than considering buying into funds from Vanguard.
As a purely hypothetical exercise, I walked a friend through investing £10,000 as an ‘invest and leave’ portfolio using nothing but Vanguard funds.
£2000 Global Balanced Fund 0.60%
£2000 FTSE All-World High Dividend Yield UCITS ETF 0.29%
£2000 Global Small-Cap Index Fund 0.38%
£2000 FTSE Developed Asia Pacific Ex Japan UCITS ETF 0.22%
£2000 U.S Equity Index Fund 0.10%
Measuring the historic performance of these funds shows both reasonable levels of diversification, combined annual returns of at least 4% a year and average charges of just 0.32%. Of course, an investor would have to pay the usual platform fees – my broker, AJ Bell, charges an additional 0.25%, plus some negligible dealing charge (I think it’s about £1.50), but you still find that the overall charges of less than 1% leave plenty of room for portfolio growth over the long-term.
In addition to this, if this portfolio were to grow by an average of 7% a year, an investor could also sell 4% of the units a year without shrinking it’s value and still beat inflation! To me, this kind of approach seems like a good answer for people that want to start building capital, but don’t have the confidence or the time to start constructing an actively managed portfolio themselves.