Professional Finance people no better than amateurs

darkpool

atush wrote: »

I would imagine (but don't know because I am not one nor do I know one) because of the large lack of knowledge of some of the posters here.

But to ask them to answer more questions when you only ask and never answer yourself seems a bit odd to me.

but i think the IFAs try to muddy the waters with their answers. you saw helpwhereican answer to my point regarding the effect of charges on real returns -

"Not at all, just a case of ensuring some balance is there i.e. 2.5% out of 5% sounds much more dramatic than 2.5% out of 8%"

He tried to give some BS that you should ignore the real return and look at nominal return. If someone said that to me in a meeting I would let him away with it once, if he said something else that also implied I never knew about investment he would get asked to leave.

You look at what dunstonh said about trackers -

"You tell me the last time the FTSE all share tracker was best fund in the UK all companies sector over 12 months"

yeah, he is right in what he says. but why choose 12 months? academic evidence strongly suggests that trackers will beat managed funds in the developed markets over longer time frames.

There does seem to be a bias that IFAs push the higher charging financial products......

So regarding the woman with 80k that went to an IFA. If one of your family members went to an IFA and invested in a product with a 15 year life and 3% annual charges what would your initial reaction be? Would you be jumping up and down with joy? Or would you think the IFA had his commission goggles on?

dunstonh

You look at what dunstonh said about trackers -

"You tell me the last time the FTSE all share tracker was best fund in the UK all companies sector over 12 months"

yeah, he is right in what he says. but why choose 12 months? academic evidence strongly suggests that trackers will beat managed funds in the developed markets over longer time frames.

Because if you are reviewing portfolio at least annually then you look at the potential for the next 12 months.

There does seem to be a bias that IFAs push the higher charging financial products......

Where it is better to then there is absolutely worthwhile doing so. Where it isnt better than there is no point.

So regarding the woman with 80k that went to an IFA. If one of your family members went to an IFA and invested in a product with a 15 year life and 3% annual charges what would your initial reaction be? Would you be jumping up and down with joy? Or would you think the IFA had his commission goggles on?

If they were getting an annual return that was higher than benchmark then they would be jumping for joy. If it didnt beat benchmark then the the decision didnt pay off but then that is the choice you make.

You focus too much on the charge and not the potential. Paying too much for something with poor potential is totally daft. Paying more for something with greater potential is fine. That is after all the whole point of investing. To take a risk to obtain potentially more.

rockitup

dunstonh wrote: »

You focus too much on the charge and not the potential. Paying too much for something with poor potential is totally daft. Paying more for something with greater potential is fine. That is after all the whole point of investing. To take a risk to obtain potentially more.

Although I too like to keep the initial and annual costs of my investments down to a minimum, I must agree with dunstonh on this.

On trackers yes keep costs down but also take into account the size of tracking error.

On active funds if I am holding for a longer term I will go with the fund supermarket that will give the lowest overall costs for purchase/initial/annual charges.

But on a few occasions I have bought funds where I live now(no discount fund supermarkets here), that will have initial charge from 1% to 2% and an Annual Fee of 2%. These funds are quite high risk with majority of holdings in mining and financial sectors. The fund I tend to trade in and out of mostly has given me returns of 20%+ in timeframes of 2 to 3 months. Some of the buy & hold brigade who got in even earlier than me have pulled in gains of over 120% in less than 2 years.
When it comes to the types of investments that can pull in nice returns like this I don't really give a stuff about paying a bit more in charges to the fund manager or the bank's brokerage department even though I make my own choices of funds.

It is total return that matters at the end of day. If I make £10k in 1 year with £300 in charges - or I make £30k with £3,000 in charges
I know which scenario I would prefer

HelpWhereIcan

darkpool wrote: »

but if the nominal return is 8% and inflation is 3% the real return is still 5%. So 2.5% annual fees still means half the real return is getting swallowed in costs. To me that is a dramatic reduction in return.

Do not disagree - as I said, just adding balance and helping to fill the whole picture.

As a champion of educating people accurately I would have thought you would be all for making sure that people would not think equities return 5% nominal.

Just realised you would not get access to the Equity Study 2012 from that link I posted in that part of my answer - so here is the relevent table. Again, for completeness.

It helps to show that accessing Gilts and Corporate Bonds can add more real return as well as diversification - something that investing in a Pure Tracker Fund will not achieve. Another point you have chosen to ignore.


Figure 1: Real investment returns by asset class (% pa)
Last 2011 10 years 20 years 50 years 112 years*
Equities -7.8 1.2 4.8 5.3 4.9
Gilts 15.8 3.9 5.9 3.1 1.3
Corporate Bonds 1.6 1.6 n/a n/a
Index Linked 14.4 4.0 5.0 n/a
Cash -4.1 0.2 2.1 1.6 0.9

Note: * Entire sample. Source: Barclays Capita

Your 2.5% charges figure is not as representative as you would have us believe (although it is out there). You also - conveniently - ignore the fact that passive funds will have their own charges to come out of that same real return so it's not like active funds cost 2.5% more per annum on average than passive ones.

I posted a link to my evidence for this but you have chosen to ignore it, again relying on Polemic.

darkpool wrote: »

To be fair I do know what an ETF is, I also know what VCTs and EISs are. It seems IFAs here like using acronym to make them appear smart.

Not at all, I am more than happy to clarify for anyone who asks. I was, after all, referring to a hypothetical conversation you - an expert - and I would have. I was addressing your question about providing an example of where an IFA could add value. Helping you avoid the potential pitfalls of a synthetic ETF by selecting a 'vanilla' one would be one.

darkpool wrote: »

OK, since you like answering questions ..... why do so many IFAs want to post on a consumer website? There have been 6 so far on this thread, plus i wouldn't be surprised if other posters were related to an IFA or worked in the financial industry.

I post to help and add to the debate - as I am entitled to do no matter what my occupation. It is not my problem you have issue - and a not insignificant amount of paranoia - with that.

I have added points to support both sides of the argument. Seeing as you base all your argument on sound research etc would you care to use your experience and knowledge to give us all one flaw in the Passive argument that investors should be aware of? For the sake of balance. (Try really showing off and give us one that has not been mentioned yet)

Now, care to answer my question about taking part in an experiment? (or any of the others for that matter)

HelpWhereIcan

rockitup wrote: »

Although I too like to keep the initial and annual costs of my investments down to a minimum, I must agree with dunstonh on this.

On trackers yes keep costs down but also take into account the size of tracking error.

Just to ensure darkpool doesn't claim you are a closet IFA trying to bamboozle people with technical jargon; here are a some links to good explanations of Tracking Error - from a fan of passive investing no less.

http://monevator.com/2011/01/18/tracking-error-%E2%80%93-a-hidden-cost/

http://monevator.com/2011/01/25/choosing-a-tracker-using-tracking-difference/

http://monevator.com/2012/02/21/how-to-use-tracking-error-to-uncover-the-true-cost-of-an-index-tracker/

Also saves darkpool googling it himself and then telling us all he knew what it meant all along

gadgetmind

HelpWhereIcan wrote: »

Jhere are a some links to good explanations of Tracking Error

Yup, that's why I chose Vanguard.

from a fan of passive investing

The ranks of such fans continue to swell as the adverse investor outcome that high fees creates becomes increasingly apparent.

I've continued to tweak things over the last week and I've moved from about 60% passive to just shy of 90%, mainly using Vanguard trackers but with some Blackrock in there too. Active is now restricted to strategic bonds, conviction ITs, REITs and a few minor themes.

psychic_teabag

I came upon a reference to the chap who runs the Fidelity tracker justifying his tracking error. One interesting reason he came up with that hadn't occurred to me was that the fund is priced in the middle of the day, whereas it tends to be the closing price of the index that people notice. Intra-day changes in the index can be the same sort of order of magnitude as the tracking error, so this effect can be significant, though it doesn't constitute an actual cost to the investor.

I believe vanguard fund is priced at the end of the day, rather than the middle of the day. (Or did I misremember that ?) But HSBC and Fidelity are presumably both priced mid-day and so should see the same amount of error.

Well, I thought it was interesting... I can try to dig out the reference if anyone wants it. (Blog on the fidelity site, referenced from motley fool site.)

gadgetmind

psychic_teabag wrote: »

I believe vanguard fund is priced at the end of the day, rather than the middle of the day.

It varies from fund to fund depending on the underlying markets.

Note that Vanguard do some security lending to help improve the return of many of their trackers, which doesn't add much, but does seem to cover their fees in many cases.

JoeCrystal

Lokolo wrote: »

and because it's a slow day at work....

The day I come to work and find this site is blocked.... oh heavens, no idea what I'd do!

Starts sobbing?

Cheers

Joe

darkpool

dunstonh wrote: »

Because if you are reviewing portfolio at least annually then you look at the potential for the next 12 months.

You focus too much on the charge and not the potential. Paying too much for something with poor potential is totally daft. Paying more for something with greater potential is fine. That is after all the whole point of investing. To take a risk to obtain potentially more.

but share investments should be for at least 5/ 10/ 20 plus years. i think over that time the tracker will prove to be a superior investment.

just because a managed fund has a high charge doesn't mean it is any good. if you are only interested in potential the national lottery is the way to go. if you want to consider potential and risk, trackers will be a better bet.