Comparative returns
by Doug Brodie
/1. Comparative returns
Investing is not a binary function.
We own no investment funds or products.
We are investment agnostic; in 2009 the bulk of our client investments were in fixed income and cash.
Every year we re-run the figures for our comparative research; this contributes to our decision making and advice. These are the charts of the four main strategies that everyone talks about: 20 years from 2004 to 2023, comparing initial income of 4% of the fund.
Strategy 1: HSBC FTSE 100 Index tracker fund with 4% fund drawdown
Strategy 2: MSCI World Index with 4% fund drawdown
Strategy 3: 60/40 blend of MSCI Index/M&G Corporate Bond Fund with 4% fund drawdown
Strategy 4: Investment trust dividend portfolio with natural dividend income alone
/2. Charlie Munger’s Almanack
At the time he died, Charlie was worth $2.2 billion, and he’d sold or donated several times more than that. In 1962 he bought oil royalties for $1,000, and by 2012 he was still receiving almost $6,000 per month. In total he estimated he’d made over $1 million back, however that took time.
Munger was an expert in simplifying the investment decision – this is the road map we alluded to in this week’s email. Now you can follow Charlie’s directions or follow your own directions, investing is non-binary (like satnav directions), however it’s often safer to follow the proven path.
Understand the business you’re investing in: we take months working with clients before investing, that’s because we believe it is important to understand how you are invested so that you have realistic expectations.
“So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose. And that's as close to certain as any prediction that you can make. You have to figure out where you've got an edge. And you've got to play within your own circle of competence,” highlighted Munger.
Valuation discipline: if you don’t understand the investment, you will not be able to value it with any accuracy – is it too expensive or too cheap? Investment trust discounts can widen considerably – some discounts mean that making money from the trust is simple, some discounts mean the trust is toxic. Do you know the difference? Munger advocated focussing on quality and building in a margin of error.
Long term mindset: you are intending to be retired for several decades so don’t react to short term information. There are risks in investing, nothing is simple and easy, so if you can find a fairly-priced asset with a great manager, buy it and sit back, it tends to work out very well. In that mix comes compounding and that – by default – cannot make any profits for you in the short term. In Charlie’s inimitable words:
“You have to eat the carrots before you get the dessert.”
/3. Where DIY investors get stuck
We get many enquiries from people who have supervised their own investments over their working careers, chiefly with money at Hargreaves Lansdown and Interactive Investor. Why do they want to talk to us?
Eventually, you come to the realisation that income investing is not the same as accumulation – if you make a wrong call in the growth phase you don’t have to admit it to anyone and you can tell yourself that time will heal it over time. Every DIY investor has an asset that has fallen and yet they hold on in good faith it will recover. In truth they are refusing to admit that investment failed – get over it, some investments always fail, which is why you need diversification.
Products are not the same. If you’re heading into retirement you need to consider what you need now, in ten years’ time, then when you’re in your 80s. Do you run part of the portfolio to use your CGT allowance? If VCTs and EISs give upfront tax relief and no CGT liability then why aren’t the investment returns up to scratch? Is this the right ISA? Many investment products have two different classes – one for retail direct, one for intermediaries, with different support, different websites and different pricing – AJ Bell being a good example, and bond providers being another.
A lawyer from the Magic Circle proudly displayed his self-built portfolio to me explaining that he’d preferred to avoid paying advisory fees. His Prudential administrator correctly informed him he had no fee to pay on the £100k bond, however the lawyer failed to see the 6% commission they had deducted at source.
We were asked last week to look at a SIPP run by a very small, minor firm: in that SIPP the investment was held within a bond from the offshore insurer RL360. We knew exactly why that was however we waited till we got the copy paperwork before running the explanation for the client. She was happy for the long term commitment so didn’t mind the exit fees if she took the money from the bond early. This is the illustration of charges from the SIPP:
Cheap, flat fee, pourquoi pas?
Bonds are frequently used to hide charges; would you understand what this means in cash terms?
What it meant for this client was that she actually paid an initial commission of £127,688 on her SIPP. The SIPP company and RL360 do not try this on with FCA regulated advisory firms, chiefly because it’s our job to unpick everything and recommend the best current options. By comparison, the charges we negotiate down are normally nil initially, and on all unit trusts and OEICS, our trading terms are always fully discounted.
/4. In the FT
/5. How many of these have you got?
What 42 of our clients told us about their favourite books, their first albums and what’s top of their bucket list.
