private investment: mind the fees

Sorry to harp on this, but I am concerned that so many of my friends and relatives throw away good money by paying large fees to investment managers. Sadly, high fees are also charged by UNFCU Advisors, even though the United Nations Federal Credit Union, like all credit unions, is owned by its members.

The Financial Times has published numerous columns on this subject, all with the same advice. Here is the latest.

If you’re reading this, chances are you’re interested in investing. If so, then it’s likely that your email inbox is bulging with investment ideas – stock tips, thematic pieces on how investing in India or biotechnology will generate huge returns, or profiles of fund managers who can turn water into wine. ….

I was involved in the hedge fund industry for years, and that experience taught me that, from a private investor’s point of view, most of these ideas are not worth following.  I believe the vast majority of investors would be far better off with a process based on the sticking to four principles:

You have no special edge

…. That’s why you pay a fund manager, or a financial adviser. But unfortunately, most of them can’t [select good investments] either ….

Go low – low effort, low cost, low worry

…. Both equity and bond exposure can easily be achieved via exchange traded [index] funds. You can add other government and diversified corporate bonds if you have appetite for a bit more complexity in your portfolio, but even without these it’s very powerful. The bonds control the risk and volatility, the equities deliver the growth.

Think about your specific circumstances

…. Far too many people invest in isolation …. Typically, investors will already have a disproportionate exposure to their domestic economy through their house. They may be heavily exposed to a particular sector courtesy of their job. If you work in IT, you shouldn’t have a portfolio of tech stocks too – it just adds to the concentration risk.

Be a stickler for costs

The portfolio above should only be implemented via extremely cheap index tracking products that charge 0.25 per cent a year or less. …. [S]uppose you are a frugal saver who diligently put aside 10 per cent of £50,000 annual income from the age of 25 to 67. Assume that your investments return 5 per cent a year (this is in line with long-term real equity returns). Consider a typical 2 per cent annual cost difference between an index tracking product and an actively managed fund (including all the extras, not just the management charge). As you get ready to retire at age 67 the difference in the savings pot is staggering. You are left better off by perhaps £250,000 in today’s money simply by investing with an index fund as opposed to an active manager.

Lars Kroijer, “Four principles for stress-free investing“, Financial Times, 10 May 2014.

There is much more at the link.

Lars Kroijer (born 1972) is a Danish national who lives in London. He is author of Money Mavericks: Confessions of a Hedge Fund Manager (FT Press, 2nd Edition, 2012) and Investing Demystified: How to Invest Without Speculation and Sleepless Nights (FT Press, 2014).

See also my recent posts here and here.


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