MSE News: Financial advice shake-up: what will you pay?

grey_gym_sock

diluting the risk by not investing all available money has some merit.

however, that will dilute the expected return as well as the risk. diversification may be able to dilute the risk without diluting the return, or at least dilute it less.

bonds are 1 option for diversification. though i understand being wary of them in the current environment.

other options include overseas shares (assuming your 20-share portfolio is all UK), REITs, ...

doughnutmachine

Linton wrote: »

They could also invest in bonds. However the point is that a unit trust can buy a much larger number of different shares than you could simply because its resources are much larger. This is important if for example you want to invest £5K in the USA - you could not sensibly buy sufficient USA shares to create a diversified holding. A fund can invest in shares that you would find difficult and/or expensive to deal in, say those in the Far East. Finally in some areas a fund managers expertise is essential. A good example is smaller companies where the fund manager would analyse the accounts and talk to senior management before putting significant money into a company's shares. You would find it difficult to get the same level of insight.

all good points, the perception down my "local" is that unit trusts generally aren't worth the fees though. i fully agree it is more or less impossible for a brit to get direct exposure to smaller markets, so maybe UTs are better in some areas and not others

jimjames

doughnutmachine wrote: »

fair point, but did they not go up in value later?

As with BP the price dropped and has recovered.

Others havent - such as Comet or Woolworths or Northern Rock or RBS

6 years ago you could have asked anyone if RBS was high risk and got the answer - no way. Rather different now in hindsight. At least in a fund you wouldnt be exposed to a single share as badly and can also invest worldwide at a far more reasonable cost than buying shares across world markets.

grey_gym_sock

doughnutmachine wrote: »

the perception down my "local" is that unit trusts generally aren't worth the fees though

there is a choice of actively managed funds or tracker funds. with actively managed, somebody is paid to (try to) pick the best shares to buy; with trackers, they just buy a little bit of everything (in whichever market they're supposed to be covering). trackers are generally a lot cheaper. there is a good case that it isn't worth paying the higher charges for actively managed funds.

a cheap tracker (they have got cheaper in recent years) may work out cheaper than putting £2000 into 20 shares yourself.

and that's just for basic UK shares. for overseas shares, the dealing costs are generally higher (especially when you take forex charges into account). and you'd need more money to get a decent spread of shares across a range of countries. so you realistically need a fair bit more money to DIY for non-UK investments.

jamesd

doughnutmachine wrote: »

as i understand it about twenty shares in a portfolio is plenty? two grand in each share is only 40k - not a massively large amount of money.

In fund terms, a fund using only twenty shares is a highly concentrated, high risk investment strategy.

doughnutmachine wrote: »

but surely a unit trust (or whatever) holding shares will go down in value too? i really don't see why directly held shares are riskier than a unit trust holding the same shares?

If you can put the time in to follow them well they aren't necessarily higher risk than a fund doing the same, but a fund probably wouldn't do the same, because that's too few shares for good levels of diversification for a fund.

For an individual investor it's not that easy to get broad sector and international coverage with only 20 shares at reasonable cost.

You're also perhaps showing a bias towards larger than normal investment values with the £40,000 pot size. Most people don't have anything like that much to invest, not even in a personal pension. Which is sad, but still reality. You and I may do, of course, but it's worth knowing that this makes us fairly uncommon.

doughnutmachine wrote: »

surely unit trusts etc all invest in shares? so by investing directly i'm cutting out the middle man and saving some cash?

If you can keep the trading costs low enough, maybe. If you're increasing your total investment you'd find it hard to match the low costs of using a fund for initial buying, even if you did then sell the fund and buy shares every few years to try to keep the share trading costs down.

doughnutmachine wrote: »

tbh, i know a lot of people say gilts/ bonds are moderate risk, but there is no way my cash is going into fixed income with the BoE printing money. so i'd rather mix my shares with some cash to get an overall medium risk

On average they are low risk but now isn't an average time. Now they are more into bubble territory and quite high risk, even if quite low volatility. I tend to suggest commercial property funds as an alternative.

doughnutmachine

jamesd wrote: »

If you can keep the trading costs low enough, maybe. If you're increasing your total investment you'd find it hard to match the low costs of using a fund for initial buying, even if you did then sell the fund and buy shares every few years to try to keep the share trading costs down.

but a 40k portfolio in a nominee account will only have maybe 40 pounds in charges a year (assuming no churn)? a unit trust typically has charges of 2% ie £800 pounds a year?

jamesd

More like 1.25% for an active managed fund plus 0.5% optional to pay for ongoing IFA servicing if desired. That's typically available with no stamp duty or dealing charges and includes the fund manager actively monitoring the companies held. But if you wanted minimal churn you'd also presumably be looking for a passive tracker fund at more like 0.25% plus an optional 0.5% for ongoing IFA servicing if you want that.

A no churn assumption can be OK if you're not investing more money and plan to sit around not doing anything whatever happens to the holdings. Once you start increasing the amount invested you're inevitably going to get dealing charges and perhaps stamp duty as well.

dunstonh

but a 40k portfolio in a nominee account will only have maybe 40 pounds in charges a year (assuming no churn)? a unit trust typically has charges of 2% ie £800 pounds a year?

unbunbled, as that would be the method that would apply going forward, the charges are more typically 1.10% TER or lower.

Platform charges would be the same irrespective of investment type (although quoted stocks would have dealing charges). Adviser charges would be the same irrespective of investment type (although hourly rates could come in more expensive if you had 40 odd shares to process).

gadgetmind

doughnutmachine wrote: »

but a 40k portfolio in a nominee account will only have maybe 40 pounds in charges a year (assuming no churn)? a unit trust typically has charges of 2% ie £800 pounds a year?

My wife has a portfolio of 25 UK income shares (spread widely across the various sectors) and pays nothing pa currently.

For international exposure, we tend to use ITs and bond ETFs more than OEICs/UTs but also hold a big wodge of Vanguard trackers.

No IFA in the picture and care taken with fees so overall we're well sub 0.5% pa in TER.

grey_gym_sock

doughnutmachine wrote: »

but a 40k portfolio in a nominee account will only have maybe 40 pounds in charges a year (assuming no churn)?

you also have to reckon for the cost of buying and eventually selling, spread over the number of years you expect to hold the shares.

e.g. suppose £200 commissions (at £10 per share) to buy 20 shares, and eventually the same again to sell them.

£200 stamp duty (at 0.5%) when buying.

bid-offer spreads of perhaps £40 (at 0.1% - assuming they're big-ish companies - smaller companies would be more).

that's a total of £640 to buy and sell again, or 1.6% of your investment.

so if you hold for 5 years, it's 0.32% per year.

you could buy a UK tracker fund for a bit less than that, and you'd also get a lot more diversification from the tracker.

if you keep your shares for 10 years, your cost per year falls to 0.16%, probably less than a UK tracker. but you still have much less diversification.