A friend of mine used to make a speech to new joiners at a prestigious management consultancy where he worked. He got their attention by saying that they were, he assumed, joining the firm for one reason only; to make money. He went on to tell them that there are three ways to make money; to inherit it, to marry into it or to work hard at McKinsey. He knew, he had done them all.
I am going to tell you how not to waste money managing your savings. I know because I have tried the lot. I am in a Cayman Islands hedge fund that charges the old-fashioned 2:20 fee structure that has made so many hedgies rich. This means that the manager charges a 2% annual fee and in addition skims 20% of any profits. Nice money if you can get it. Actually this fund has performed well and I am happy to treat Gifford to dinner when he is in London.
I have an old-fashioned stockbroker, Trevor, who has looked after me since the 1980s. He worked originally at a mid-sized UK broker that was taken over by a Canadian bank at Big Bang that regretted the purchase. He is now at Investec. They have different charging structures. I pay “execution only”, meaning that I pay a relatively low fixed annual fee but rather high commission rates when I deal. This discourages me from over-trading which is an excellent discipline. And we take it in turns to pay for lunch.
I use an online platform for an ISA and SIPP. This is very cheap with the main element of the dealing charge being Stamp Duty. A big advantage here is that I can reinvest dividend income cheaply. Besides being expensive to reinvest small amounts using Investec, it creates a huge problem when calculating CGT. There is no annual fee for the ISA. There is a very low fixed annual fee for the SIPP, less than 0.1%. No lunch.
I also invest directly in Unit Trusts, there is no point paying a broker to buy them, just send them a cheque. The fee for my favourite fund manager, McInroy & Wood, used to be 1.5% and is now 1%. I have tried other funds with higher charges that have not performed so well. Besides excellent performance, I get good value out of them for my 1%. They deploy some of my money in government and corporate bonds – much too difficult for me to do as an individual. Also they invest in overseas markets – ditto. And Francis buys me lunch.
My money at Investec and in an ISA and SIPP is in a few individual stocks but to a large extent in Investment Trusts. This is a vehicle I love. They are low cost, typically about 0.7% a year, and they are usually at a discount to their net asset value. If you are after capital growth and don’t want income there are ITs that pay low or no income. If you are a dividend hunter there are ones with yields around the 4% mark. I am looking at ETFs (Exchange Traded Funds) because they too are low cost but I want to know more before I dip a toe in that pool. I have my eye on a Vanguard high yield ETF but need to do more homework.
What I do not do is to pay a broker to manage my money. There would be an annual fee based on the value of my portfolio. Much of the money would be invested in funds with charges that I have described. So I would be paying twice.
Although I do hold shares in individual companies I am not a stock-picker. The head of the FT Lex column wrote recently ” that actively trading individual stocks is a lousy way for non-professional investors to get richer. Too much money goes to brokers’ fees and the tax man, and trying to beat the market in a few hours of trading after work is a fool’s errand”. I couldn’t put it better.