Farid Sedjelmaci
Sep 3, 2018 · 5 min read

Wealth managers, financial advisers and full-service fund managers all have a vested interest in convincing you that they can earn you more than the competition or the market. For that, you’ll have to pay a hefty price through one-off commissions, annual charges or, in most cases, less transparent forms of fees.

With the advent of financial technology and the blossoming of innovation in the investment space, we believe that this approach is out-dated, and most likely wealth destructive (unless you are an ultra-high-net-worth individual who needs to manage complexities such as intricate tax exposures, succession planning, or simply so much money you have too many decisions to make for yourself)

We have assembled some words of wisdom based on our experience and the advice of professionals in the market. It won’t help you get rich (if you are not already), but it will help you consistently grow and protect your asset base.

Take a good look at your assets : this advice applies to long-term financial assets

This piece of advice applies to the bulk of your financial assets. Most experts recommend you set aside a ‘rainy day’ cash fund to meet emergencies, and you shouldn’t include your house in investments, either.

You may want to divide your assets up into

1) The bulk of your long-term financial assets (e.g. retirement money, investment funds) ; the common assumption is that you will most likely not need to access those funds for at least 5 years;

2) A smaller chunk of assets allocated to riskier / higher return strategies, such as ‘angel’ investing, stock picking, art, or even cryptocurrencies if you wish to — experts generally say 5 to 15pc of the total is the right percentage;

3) Your low-to-zero risk, easily accessible assets (cash savings) : put aside enough to survive for six months with no money coming in, and add to that any funds earmarked for specific short-term goal (e.g. buying a house or a car), parking funds while waiting for longer-term investment opportunity to come up, or simply assets for which you would like to take no risks (and accept lower returns). You can check our take on Cash Savings here

In the rest of this article, we’ll be talking about how to invest those long-term funds that fall into the first category.

Think hard about risk and embed it in your investment objective

Next you need to do some hard thinking about risk. There’s no free lunch here; risk always relates to reward — if you want a higher return, you’ll have to take on more risky types of investment. On the other hand, if you really don’t want to run much risk, your returns will also be limited.

The key is to think dispassionately — don’t be alarmed at the word ‘risk’ — and to ensure that you take just as much risk as you need to achieve your objectives. Your risk appetite will determine the type of assets you should be investing in (for example, emerging market equities vs government bonds). This is probably one of the real value-adds of financial advisors and there are plenty of online options to help you think through that process.

Diversification is your only free lunch in the investment world

Diversification is a key concept in managing your investments. You should aim to spread your exposure as widely as possible — to “buy the market” — for two main reasons.

First, quite simply, a wide spread of investments minimises your exposure to any single risk, whether that’s geographical, sector-based, or even within an asset class (European equities vs large cap US equities vs mid cap US equities). So make sure all your eggs are not in one basket.[Farid Sed1]

Secondly, there is plenty of academic evidence that even the best expertise — assuming you have access to it — doesn’t beat the market consistently. You should buy broadly based investments, because they’ll limit your downside while allowing you to get market-average gains. This is all a world away from the way most fund managers represent investment. They talk about picking the right stocks, finding the right themes, taking advantage of market movements.

Costs can eat your investments

High investment management costs and HMRC are probably the two biggest wealth destroyers for most personal investors.

Actively managed funds are particular offenders. They have a whole battalion of different costs; management fees, exit fees, entry spreads, trading costs, custody costs, performance related fees. Often, the basis of these costs is opaque. Industry regulator the FCA warns in its Asset Management Market Study that “investor returns are significantly reduced by costs” — it’s working towards a standardised fee structure, but that hasn’t happened yet. You’ll probably end up paying 2–3% a year, in total.

3% a year can add up. It doesn’t sound like much, but over 20 years, even if your investments grow at 8% a year, it could knock between 20% and 30% off the eventual value of your nest-egg.[Farid Sed2]

Tax is the second great wealth destroyer. Fortunately, by using tax wrappers like ISAs and SIPPs, most investors can shelter a good deal of their wealth from both income tax and capital gains tax. But watch out — some tax breaks cost almost as much in fees as they save in tax.

The better alternative

With figures like those it’s hardly a surprise that passive investing is becoming much more popular, using ETFs which give investors the chance to access an entire asset class in a single easy transaction, at low cost. ETFs can’t underperform the index (because they are the index), they’re easy to buy and sell, and there are plenty to choose from.

Can’t you just buy your own? Yes, you could. Or you could use a robo-advisor. That will cost a bit more, but it has its advantages. The robo-advisor will then create a portfolio of ETFs that match your investment objectives — and it will continue to monitor your portfolio 24/7, making sure you’re never taking more risk than you’re happy with. While traditional players charge 2–3%, robo-advisors which use technology to reduce the cost of fund management charge just 0.7–1% including ETFs fees.

To help you, we have curated a list of top robo-advisors in the UK (check here our post on how to pick a robo-advisor).

#numeos #numeosmart #bestsavingsaccount

Numeos

A game changing distribution platform for retail financial products

Farid Sedjelmaci

Written by

CEO and Co-founder @Numeos. Seasoned leader in financial services and fintech

Numeos

Numeos

A game changing distribution platform for retail financial products

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