My first portfolio

yatinsardana

I want to put a thought out and I know it won't be a popular one:
I've taken on board that index trackers are probably best for the novice investor over the long term and that's what I intend using .

But really if I have a look at TER including platform fees of 0.45:
Active funds are about 0.75+0.45%
Trackers are about 0.25+0.45%

So as I don't have experience in investing in funds, correct me if I'm wrong but there's basically a difference of 0.5% pa
Does this essentially translate to if you have a holding of 10k in a fund you're paying £50 extra for active.

Essentially if the market goes up or down, on average active funds or index trackers will follow the same direction so you'll either be 0.5% better off or worse off

I appreciate that's 0.5% extra every single year and it adds up but I would counter that saying as does your portfolio. So if your holding goes from 10k to 20k, you pay £100 extra which is still 0.5%

Marazan

yatinsardana wrote: »

I want to put a thought out and I know it won't be a popular one:
I've taken on board that index trackers are probably best for the novice investor over the long term and that's what I intend using .

But really if I have a look at TER including platform fees of 0.45:
Active funds are about 0.75+0.45%
Trackers are about 0.25+0.45%

So as I don't have experience in investing in funds, correct me if I'm wrong but there's basically a difference of 0.5% pa
Does this essentially translate to if you have a holding of 10k in a fund you're paying £50 extra for active.

Essentially if the market goes up or down, on average active funds or index trackers will follow the same direction so you'll either be 0.5% better off or worse off

I appreciate that's 0.5% extra every single year and it adds up but I would counter that saying as does your portfolio. So if your holding goes from 10k to 20k, you pay £100 extra which is still 0.5%

If you are using a broker with a 0.45% platform fee you should stop now and use one that has a 0.25% or 0.35% platform fee instead. (Or got to fixed fee once your holding become big enough).

Also, I don't understand what your thought/point is.

SlapShot

yatinsardana wrote: »

I want to put a thought out and I know it won't be a popular one:
I've taken on board that index trackers are probably best for the novice investor over the long term and that's what I intend using .

But really if I have a look at TER including platform fees of 0.45:
Active funds are about 0.75+0.45%
Trackers are about 0.25+0.45%

So as I don't have experience in investing in funds, correct me if I'm wrong but there's basically a difference of 0.5% pa
Does this essentially translate to if you have a holding of 10k in a fund you're paying £50 extra for active.

Essentially if the market goes up or down, on average active funds or index trackers will follow the same direction so you'll either be 0.5% better off or worse off

I appreciate that's 0.5% extra every single year and it adds up but I would counter that saying as does your portfolio. So if your holding goes from 10k to 20k, you pay £100 extra which is still 0.5%

There are a few things with this:

First, your 0.5%pa difference per annum does not accumulate, it compounds - you also lose the compounded growth of the "missing" 0.5% every year. I.e. it's more than you think - have a play with a spreadsheet to get a feel for this and it's especially important in the long run where this missing compounded growth really adds up.

Then, there are also additional costs in active management that don't show up in the TER, namely trading costs and frictional costs from spreads. These can be substantial if the fund has a high portfolio turnover ratio. (But there are active funds where this is very low too). Most indices (with notable exceptions) have very low turnover.

Finally, this is assuming that you get similar performance, there is a risk that you don't (especially after all the additional costs) and this is likely down to luck. So control the things you can (i.e. costs!).

The subtle follow-on point from this is that there is also a "behavioural" cost - in that, private investors are good at buying high and selling low. Namely, active funds (largely for style reasons) go through periods of over- and under-performance. The risk you face is that you confuse over-performance for skill - and this is massively exploited by marketing departments across the financial services industry!) - and buy something at the worst possible time, thus suffering a period of under-performance, at which point you throw the towel in and buy a "better" fund and the cycle repeats! This one's huge - index tracking removes this risk by taking you out of this game.

I also agree with the previous comment, the 0.45% fee you're paying can and should be reduced by switching brokers. In the process, you'll also remove yourself from the wealth-damaging marketing stream that is associated with certain brokers!

Daniel

SlapShot

PS Have you read John Kay's book "The long and the short of it"? It's really excellent, it's well worth a read.

yatinsardana

Marazan wrote: »

If you are using a broker with a 0.45% platform fee you should stop now and use one that has a 0.25% or 0.35% platform fee instead. (Or got to fixed fee once your holding become big enough).

Also, I don't understand what your thought/point is.

I'm with HL at the moment. I considered changing my broker next ISA year but it was suggested on this forum that since I'm new at investing with a small portfolio, I might be better off sticking with HL for the moment as I know their layout and they're not much more expensive than others for a small portfolio.

I don't know, maybe I should consider moving to another broker - I'm just undecided. If I do need to move, do I just open up a new account with another platform in the new year. Don't have to do anything with HL?

yatinsardana

SlapShot wrote: »

There are a few things with this:

First, your 0.5%pa difference per annum does not accumulate, it compounds - you also lose the compounded growth of the "missing" 0.5% every year. I.e. it's more than you think - have a play with a spreadsheet to get a feel for this and it's especially important in the long run where this missing compounded growth really adds up.

Then, there are also additional costs in active management that don't show up in the TER, namely trading costs and frictional costs from spreads. These can be substantial if the fund has a high portfolio turnover ratio. (But there are active funds where this is very low too). Most indices (with notable exceptions) have very low turnover.

Finally, this is assuming that you get similar performance, there is a risk that you don't (especially after all the additional costs) and this is likely down to luck. So control the things you can (i.e. costs!).

The subtle follow-on point from this is that there is also a "behavioural" cost - in that, private investors are good at buying high and selling low. Namely, active funds (largely for style reasons) go through periods of over- and under-performance. The risk you face is that you confuse over-performance for skill - and this is massively exploited by marketing departments across the financial services industry!) - and buy something at the worst possible time, thus suffering a period of under-performance, at which point you throw the towel in and buy a "better" fund and the cycle repeats! This one's huge - index tracking removes this risk by taking you out of this game.

I also agree with the previous comment, the 0.45% fee you're paying can and should be reduced by switching brokers. In the process, you'll also remove yourself from the wealth-damaging marketing stream that is associated with certain brokers!

Daniel

You're a genius, Daniel. Thanks!
So I did use a spreadsheet as per your suggestion. The results are as follows:
1) Investing 2500 annually into a fund with TER 0.50% (rough figure for purposes of calculation) and giving an annual return of 7% meaning a net return of 6.5%
2) Investing the same amount into a fund with TER 1% and giving same return meaning net return 6%.

Result:
After 10 years - portfolio size in situation 1 is 35928, portfolio 2 is 34929 (Difference of roughly 1000)
After 20 years - portfolio 1 is 103372, portfolio 2 is 97482 (difference of 5890)
After 30 years - portfolio 1 is 229973, portfolio 2 is 209504 (difference of 20k)

(If you double your annual investment to 5k, the difference essentially doubles)

It seems like it adds up more and more with time.
Therefore, my impression is for shorter term investments (up to 10 years), you won't realise much of a difference
BUT if you're truly investing for long term then trackers seem sensible.

With regards to the assumption that active funds perform the same, that's something I can't comment on. Obviously like all of you are saying it ends up that active fundsdon't really do any better in the long term.

Keeping all this in mind, it may be an idea to invest mostly in trackers but also maybe have 1 or 2 active funds. I'm going to start off with the trackers I mentioned and maybe the Marlborough Micro cap.

I'll check out that book, Daniel. Thanks!

yatinsardana

A_Flock_Of_Sheep wrote: »

The hardest part about investing I found when I began just over a year ago was:

Switching off from noise
Ignoring daily market movements
Acting on share recommendations and tips
Acting on adverts on HL for the latest and best funds
Being drawn into the latest investing fashion or trend thus losing sight of your overall investing reasons leading to gambling on the system

Good luck.

Very very wise words and also in my little experience in investing, I can already see this be relevant. In your naivity you get so heavily influenced by all the noise, the daily movements and the share recommendations!

yatinsardana

So a look at the monevator chart for comparing different brokers seems to show that CSD offers the best option for me.
0.25% platform fees and also importantly free fund dealing. As I plan to invest monthly into funds, that is one of the most important features I want in a platform (and I know it's becoming a rarity but to at least get me started and build a healthy portfolio, I need to be regularly investing)

Share dealing is cheaper too (£10).
Do we agree this suits me best?

Now there are 2-3 things I need to do:
1) look at the range of funds offered
2) look at the TER for the funds. HL offer savings on individual funds too (quite a few of them) so if I don't get that 0.1-0.2% savings with CSD then were back to square one and I may as well stick with HL.
3) look at the shares that are on offer - presumably AIM market is included in the isa there too.

Im slightly apprehensive about changing platforms to be honest but I'll explore CSD fully

yatinsardana

Sorry for continuing this topic but as I've done a bit of research regarding different platforms over the last day, I thought it should just mention it here in order for completion.
I'm with HL right now and as pointed out correctly it's costing me a fair bit.
I had narrowed down my options to HL, CSD and II. (the first 2 are obviously percentage-fee platforms and II is flat rate).
With HL, the advantages were that I really liked their website (quite user friendly), the articles etc. I'm also used to their structure as I'm with them at the moment. Also, they don't charge for fund dealing which is good. With regards to the fund TER, they offer some discount (almost all of the platforms seem to offer complete discount on the initial charges, HL goes a little further by reducing their AMC by usually 0.05-0.1% too).

The downsides are the 0.45% management fee (for funds and shares), 11.95 for share dealing, quite a big exiting charge.

With CSD, it seems cheaper than HL. 0.25% management fee for funds, same for shares unless you make 6 trades in 6 months. free fund dealing.
£10/share dealing.
Downsides are I'm not a big fan of their website. It also keeps freezing on my ipad (I know it sounds silly but I'm just writing what I think).

II - because it's flat rate, the general thinking is that it works out better for bigger portfolios
It charges 80/year for management which is essentially adjusted in £80 of trading fees (2 trades a quarter). I like their website, they seem to offer everything HL does.
Downside obviously is that at present I don't have a big portfolio so it may be more expensive for me.

However, keeping in view everything I've decided to go with II. ALthough I have a small portfolio right now, I definitely intend to add around 10k to it every year.
If I want to invest in 3 funds a month (with regular investing fee of 1.5) I pay 13.5 a quarter (which is adjusted from my 20 management fee).
Also I've got some management fee that's left and still hasn't been adjusted - so if I were to buy 3-4 shares a year, part of the buying fee (£10) can be adjusted. (I don't know if that's possible? I'll call them up and ask them). But even if it isn't possible and I have to pay for the share dealing cost, still that's exactly the same as the other 2 platforms so doesn't really matter.
Last up side is that there's no separate management fee for shares (it's all taken into account in the flat £80) vs 0.45% HL vs 0.25% CSD.
Therefore, I really don't think it'll be much more expensive to go for II and it'll pay off later when I have a bigger portfolio and my management fee isn't percentage linked and is a flat rate.

Hope you all agree, I'm finally convinced in my mind!
Now all I need to do is find out how the whole adjustment of £20 per quarter works. If I spend 13.5 a quarter on regular fund investments, can I use the remaining 6.5 and add 3.5 to pay for a share transaction?

Also because I have a very small amount in my HL account, I'm thinking of basically withdrawing that right now and putting it into my new II account (when I have a new one) because I won't be able to add 15k to my isa this year and that way I still am a member of HL and can read their articles and access their info ! Cheeky? I think not.

ColdIron

yatinsardana wrote: »

that way I still am a member of HL and can read their articles and access their info

You can access most of the HL site whether you are a client or not