Posted on 27 September 2013 by Douglas Chadwick
I have just read a very informative and well written article on the subject of D.I.Y. investing for your ISA and SIPP. It was produced and published by Hargreaves Lansdown the largest Fund Supermarket platform in the United Kingdom. The article was broken down into four sections. I have précised these as follows:
- Focus on the future, not just the past....Assessing which investments are likely to perform well in the future is much harder than looking at which have done well in the past -nobody has a crystal ball. However a detailed analysis can separate the element of returns which are attributable to luck and which are to judgement.
- Diversify your investments........Different areas perform well at different times.(Think Emerging Markets) Diversifying maximises the potential for long term returns but investors who focus on one particular area will only be right some of the time.
- Do not take unnecessary risks.....It is essential to look at the volatility of an investment as well as the potential returns. On occasion two funds may have similar returns but one is more volatile. So from a risk reward perspective you should choose the less volatile fund.
- Do not ignore the impact of costs.....If you pay lower charges your investments will be worth more. That would seem to be pretty obvious, but remember that sometimes there can be a trade off between cost and quality. The simplest course of action for your ISA and SIPP trades must be to use a supermarket platform where most of the costs have been removed.
The article then goes on to say that there are over 2500 funds to consider when making your investment choices, and thirty two different IMA sectors. Reading this a person considering taking up looking after their own fund choices must be rocked back onto their heels, that`s if they have not already made for the door! However, wait, rescue is at hand. Hargreaves Lansdown say that they have done this work for you and have come up with their own “Wealth 150” funds. They point out that they have a thirteen strong research team that use complex mathematical models to help them make these decisions. So you may well say job done. They are advocating that by selecting from this list and taking a passive long term approach to your investment then these funds and their managers will give you a better than average return. This may be so but I believe it will not give you the best return which must come from being an active rather than a passive investor.
Hargreaves have already made the point earlier that it is important to be in a sector that is growing and that all sectors are not in favour at the same time. They also make the point that trading on their platform is cheap if not free. So all you need is up to the minute sector and fund performance numbers and then to be active and you do not need to be in a non performing sector. These numbers are available from the Saltydog Investor. Now although I recognise the merits of the Wealth150 funds, frequently there are new kids on the block and these Managers can absolutely eclipse the established funds performance. The obvious question is why would you not want to have some of your money invested with them whilst they are producing the better returns. To me this is all a no brainer.
If I was a cynical person I might think that Hargreaves Lansdown and the other platforms would like us to be on their platforms but not trading. Then there would be less administrative and transaction costs to erode the money they receive from the Fund Managers for holding the funds on their platform. Also the Fund Managers would like a quiet life where they can sit on a steady amount of investor’s money which does not fall when they do not perform. Perhaps that is why they don’t want you to be an active investor. Still, with the advent of RDR this is going to change as the public becomes more and more familiar with Internet trading and goes it alone with numbers and information that removes the “Old Guards” disinformation programme. Perhaps then more money may stay with the investor and less will move to support football and rugby clubs.