Self investment compared with managed funds

whambamboo

Anybody want to comment on which is better?

You can either buy for instance a high yield fund, or make your own portfolio.

There are two ways to look at this:

1. the professional should be better at buying and selling at the right time, so will make more money on average
or
2. the costs of the fund are much higher than running it yourself, so it's better to invest yourself

Would anyone care to dicuss which would be better for say an investment of £40k in UK equities for a typical professional of above average intelligence (i.e. somebody who would have the capability to analyse the best shares - but still might prefer to leave it to the professionals).

PBA

Intelligence is irrelevant, it all boils down to what your investment expectations are and how much time you have to be looking at the markets. If you're looking for stability then self investins may well be the best option as there are certainly shares out there which are good strong performers but which are unlikely to provide stunning returns. If you're looking for above average returns then you're probably best leaving it to the professionals as they spend all day every day looking at companies. However this option does inherently carry a hgher risk.

Chrismaths

If you have the time to research what investments you want in your portfolio, learn about how to construct a balanced portfolio appropriate to your risk, and have the ongoing time to monitor the portfolio, then there is no reason you can't do it yourself. If you don't have the time or the confidence or the discipline, then pay someone else to do it for you.

Jake'sGran

whambamboo wrote:

Anybody want to comment on which is better?

You can either buy for instance a high yield fund, or make your own portfolio.

There are two ways to look at this:

1. the professional should be better at buying and selling at the right time, so will make more money on average
or
2. the costs of the fund are much higher than running it yourself, so it's better to invest yourself

Would anyone care to dicuss which would be better for say an investment of £40k in UK equities for a typical professional of above average intelligence (i.e. somebody who would have the capability to analyse the best shares - but still might prefer to leave it to the professionals).

Just realised I sent you a message on the other thread you started. Do your own thing. I believe there is evidence that managed funds have been no better in the long term than those run by individuals. When I have looked at this the charges have always put me off. Use discount brokers to do it yourself and buy shares through good companies with low charges e.g. The Share Centre (they also give some advice), Hoodless Brennan and so on. Buy blue chips with good yields although I have recently read advice about some of them being just too big. It's not hard to find highly regarded companies with excellent managements.

EdInvestor

whambamboo wrote:

Anybody want to comment on which is better?
You can either buy for instance a high yield fund, or make your own portfolio.

From personal experience I can say that a high yield portfolio of big blue chip shares is an excellent way to invest, giving high comparative returns, taking hardly any of your time, and costing virtually nothing in charges after the first year as trading is rare.

1. the professional should be better at buying and selling at the right time, so will make more money on average

Trading is actually a great way to lose money: dealing charges and stamp duty eat into your profits.Trading is usually to be avoided.

2. the costs of the fund are much higher than running it yourself, so it's better to invest yourself

Indeed so, when you realise that a charge of 1% a year uses up 25% of your fund over 25 years, you can see that DIY will save you a substantial amount.

Would anyone care to dicuss which would be better for say an investment of £40k in UK equities for a typical professional of above average intelligence (i.e. somebody who would have the capability to analyse the best shares - but still might prefer to leave it to the professionals).

I would suggest a High Yield Portfolio as ideal for a long term investment for a lump sum. He should put it in his ISA, 7k a year, highest dividend payers first, if he is a high rate taxpayer. Hold in or out of an ISA if on basic rate, no matter.

dunstonh

Trading is actually a great way to lose money: dealing charges and stamp duty eat into your profits.Trading is usually to be avoided.

Unless you are in an investment which has free switching. Easily available for those that are going to utilise that option.

Indeed so, when you realise that a charge of 1% a year uses up 25% of your fund over 25 years, you can see that DIY will save you a substantial amount.

1% a year for providing management is nothing. At the end of the day its the end result that matters. Some investments have extremely high charges but are extremely high risk/reward. You are paying for the increased potential.

EdInvestor

Unless you are in an investment which has free switching.

Switching is not the same thing.(They often charge for that too.) I am talking about the cost of dealing, bid offer spread, stamp duty etc within the fund when the manager buys and sells shares.This charge is not revealed and not included in the TER. It can add another 1.5% or more to overall costs on top of the AMC.

More info here in the Pension Commission report on these implicit charges, see pages 218-219

Self investment and a policy of little or no trading (long term buy and hold) avoids all these charges, which are now up around the 3% range. :eek:

With estimates of equity returns now around only 7-8% , you can see that you can almost double your money by avoiding these charges.Only a fool would ignore a potential saving of this size.

Chrismaths

Yep, Just hold on to Partygaming for the long term, save trading costs!

EdInvestor

You see what I mean

First these guys spend all this money buying these risky short term shares.Then when they plummet, they have to spend even more money flogging them at a loss.

This is just punting the market, not real long term investing.

Chrismaths

Tell Nigel Thomas that! He made money out of tech companies all through the 90's, then got out before the crash. On the other side of the deal, there were people who predicted the tech boom correctly, but in about 1996. So whilst they were correct that the price rises were unsustainable in the long term, they were right at the wrong time. Anyone short of tech stocks from '96 - '99 is now bankrupt - the market can stay irrational longer that you can stay solvent. All sources of return are sources of risk (and cost), but to rule out trading as a source of return on the basis of cost seems wrongheaded. It's risk-adjusted returns net of cost that are important, not simply cost. Fund managers are fully aware of costs of trading (as it feeds through into the NAV), and indeed many are now starting to use the powers afforded them in UCITS III - to use derivatives like CFDs (which carry no stamp duty) to reduce costs in the porfolio.

As the old Keynes saying goes, when the facts change, I change my mind. What do you do? "Buy and hold forever", irrespective of what happens to the portfolio or how the world changes, is not really a sensible strategy, any more than turning over a portfolio 10x a year is a sensible strategy.

Anyway, who knows what is a "safe" company, and a "risky" company? Sure, Partygaming was an extreme example, but look at Vodafone (fell about 70%), Marconi (near as makes no difference went bust), Polly Peck, Mirror Group, BCCI, British Energy etc... All these were supposedly high quality, big safe shares in the FTSE 100, but it didn't stop them losing shedloads of money. In fact, Partygaming was a high yield stock (it was on a forecast yield of around 7% for next year before the news).

As to your comment that fund managers buy "risky short term shares" (whatever a "short term share" is?!), if you do a search on trustnet for partygaming, you will see ONE fund manager only who held it in his top 10 - and that's from Fidelity who only publish every 6 months, so even he probably doesn't hold it.