Tuesday, 17 April 2012

We can all do it ourselves – can’t we?

Over this series of blogs I have explored many issues around financial management and planning, and one area I have mentioned is around this perception that financial education is about providing information around investment “opportunities”. This made me think how upside down we are in our thinking.

The perception is that people understand what they are investing for, i.e. what their goals are and as a result of this they know how to achieve these goals.

Let me take this a step further, I have a car – I have a choice when it needs servicing I can either buy a manual that tells me how to do it or I can go to an expert. I know the expert will charge me but I am putting my faith in them to do what I need doing. Now I can save money by doing it myself I can buy the tools, the parts and fix the car. In reality I don’t know whether I have the right part and in the end I could end up having to go to an expert to sort out my mess. 


To be fair there are people who can fix their own cars and know what they are doing and why shouldn’t they do it themselves. They know when they need expert help and are prepared to take the risk that they might get it wrong. They may turn to expert help via books, blogs etc but in the main they will use their own experience and ignore all the noise.

In this blog I want to look at the art of investing, I will expand on this in future blogs but I just want to question the idea of financial education centring on investment “opportunities”. Investing is easy, anyone can do it – that is true but it needs a lot of thought and thinking. The problem is that for many they are looking for a positive return and because of information overload the idea of short term thinking is creeping in. We are also swayed by what is in the press, China is the next growth story, China is dead, China is a tech bubble. This sways how we invest.


An excellent example of this is the Fidelity China Investment Trust managed by Anthony Bolton. This was promoted heavily by a number of companies and many people invested in this fund. On the surface it looked good – Fidelity is a well-respected global fund manager, China has seen explosive returns and Anthony Bolton is an amazing fund manager. The papers promoted this and well respected platforms wrote fantastic reports on the prospects for this fund. However, consider Anthony Bolton had never managed a China Fund and this was an investment trust. The point is cut through the noise if you want to invest in China - is this the right fund to choose and is using an investment trust the right vehicle.

Going a step further and looking at your goals is China, however wonderful it may look, the right place to achieve your goals, or should you diversify your assets. I am not saying emerging markets are a bad place to invest in fact far from that personally I believe emerging markets in turns of both equities and debt offer the greatest potential for returns over the next 20 years plus. The point is you have to understand what you are doing.

Many people are disappointed with the performance of the Fidelity China Investment Trust but did those people do their research, how long are they planning to hold the investment etc. Most investments should be long term and who knows whether in five years this fund may have performed above its peer group.

The key is also diversification, if you invest all your money in China and don’t spread your investments then you will suffer disappointment because different sectors, regions, assets will perform differently at different stages of the cycle.

And then we turn to individual stocks, we may all have some shares but do we understand them. My father had shares in Barclays and they were always worth around £10,000 after 2008 they fell in value and he couldn’t understand it. In fact he didn’t understand anything about Barclays and whether they were a good or bad company. Many people think they can pick a winner when it comes to investing and some can. But this is no different to investing in a fund are you looking short or long term? Another example is Lloyds, are they a good share – possible they are at around 30p a share, they have potential to grow over the next five years, but do you understand why? Or what about Apple could they become a $1,000 a share?

Often we don’t understand this level of detail and therefore we turn to a fund or fund manager to do this for us. Turning back to the Fidelity China Fund before we invest we need to do our research, what is the process, what is the style, how does this sit with other funds in the sector, is the fund too risky for the goals I am looking to deliver and what do I know about the fund manager. We also hear cries that passive funds are better than active funds so does the fund hug the index i.e. is the fund so large that all it is doing is buying the biggest companies that make up the index and are therefore quasi-tracker funds. 

And of course building a portfolio is not just about one fund it is about mixing funds to spread the risk. What this comes down to is that investing is easy if you know what you are doing, papers and platforms make us think that simple education makes us experts but unless you know what you are doing you will get burnt. Paying an expert to diagnose what you want, identify goals to achieve this  and providing the solutions is I believe in many cases worth it when compared to the pain of getting it wrong.

Take a step away from the noise - consider the average financial planner may charge you a fee of 1% per annum. In reality if you do it yourself you will be paying 1.5% p.a. - the assumption is that with the fee of 1% the financial planner charge is 2.5% p.a.

Consider again - when you go to a financial planner you will get rebates on funds and actually the net cost may only be around 2% p.a. 

The question you have to ask is whether an additional 0.5% p.a. is worth peace of mind.

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