realistic rates of return

peterg1965

I know that crystal balls predicting future rates of investment return do not exist, but for investment planning purposes, based on histrorical worldwide stock market performance, what would be a realistic rate of return on a medium risk diversified portfolio over 10-15 years to aim/plan for?

dunstonh

I would suggest you work to 9% if you have a decent spread of investments. 7% if you have a single fund or limited spread. Always best to work to less then you should come in happy. The other way round leads to disappointment. Whilst I would consider anything less than double digits (as an average over the long term) to be a let down, you cannot bank on getting it.

EdInvestor

dunstonh wrote: »

I would suggest you work to 9% if you have a decent spread of investments. 7% if you have a single fund or limited spread.

Is that before or after charges and taxes ?

peterg1965

9% in a range of funds is what I hoped would be a reasonable planning assumption. That is what will use in my planning.

dunstonh

Is that before or after charges and taxes ?

What tax would that be?

What charges would depend on the investments within the pension and the wrapper. I have to give projections out using FSA rates so officially I would say after charges. However, I would be disappointed not to get double digit returns after charges as a long term average. I wouldnt project forward using a higher figure though because you need the margin of error that a lower projection gives you.

EdInvestor

As well as the annual management charge and initial charges (easy to avoid) unit trusts also incur hidden transaction charges which typically double the size of the AMC. Investments within life wrappers ( endowments, bonds) pay 20% tax on gains.You can easily find yourself shelling out 3%+ in charges and taxes. It's not insignificant in these days of comparatively low returns.

dunstonh

As well as the annual management charge and initial charges (easy to avoid) unit trusts also incur hidden transaction charges which typically double the size of the AMC.

You dont live in this century do you?

The typical TER is only about 0.2% more than the AMC. With the typical AMC at 1.5%, no matter how much you try and SPIN it, you cannot turn 1.7% into being double 1.5%.

Investments within life wrappers ( endowments, bonds) pay 20% tax on gains.

Not necessarily. You cannot say they pay 20% on gains as that is incorrect. Some assets will have upto 20% levied on gains but some wont. You have never got the tax right on life funds so its no surprise to see you get it wrong here as well. I notice you dont mention pension funds, which is strange as this is the pension section.

You can easily find yourself shelling out 3%+ in charges and taxes.

Only on planet Ed.

Most reduction in yields nowadays on funds see you going between 0.7% and 1.7%

EdInvestor

You don't have to take my word for it.Anyone well informed about the financial industry knows about these hidden transaction costs.

Former head of the FSA questioned by parliament explains how it works


115. Q Mr Beard MP

Could we move to stock markets now. In the unit trust industry, according to the FSA rolling models of Kevin James, hidden costs not disclosed to the investors are about £3 billion a year. Why does the FSA disclosure regime not require investors to be made aware of this sort of charge?

A (Sir Howard Davies) It would be fair to say that there is no FSA disclosure regime at the moment. There are several disclosure regimes which we have inherited from the previous regulators. One of the things we have been doing is carrying out some research into whether people understand that disclosure regime; and, also, whether it properly captures the costs of the types of investments that people undertake. That is true in life insurance and other places. We have been exploring different ways and more meaningful ways of explaining what the costs are.

The specific issue of unit trusts is that there are two sorts of costs involved in this generically. One is the overall management cost and administration cost of the fund; and then there is also the cost of trading and churning, particularly where you have an active fund. It is true that previous disclosures have tended to focus on the former showing the initial upfront charging payment and administration cost, and not focusing on the transactions cost that you undertake in order to achieve that performance.

The industry will say, "If we want to achieve superior performance and exercise our investment skill, then clearly that means there will be trading costs." We accept that. ...that research paper.... suggested that maybe a better approach to disclosure would be a measure which we would call MP1, which captures the full costs of managing the fund.

I would not conceal from you that the industry has not been over the moon about that.

Mr Beard: That's a surprise!


#Needless to say nothing has been done to disclose these additional costs because of pressure from the industry to keep them quiet. The FSA is the industry's poodle in some respects.

dunstonh

Cannot see anything about turning 1.5% into 1.7% and calling it double. Perhaps Mr Beard MP hasnt been to the Gordon Brown school of how to make a tax increase sound like a reduction.

I heard a lightbulb had to be changed at Fidelity and they are having to re-write the accounts so full disclosure of the cost of the lightbulb is made. A full page newspaper advert on all the dailies is being run to ensure everyone knows about the cost of the lightbulb.

Next they will want full disclosure on savings accounts. Dont worry that best rate is 6%, you mustnt put your money there because that firm charges more behind the scenes where cant see it than firm B that pays 5%. Those disgraceful hidden charges shouldnt be allowed and you should go with the lower rate because it has lower charges. Dont worry that firm A pays more interest. Its smoke and mirrors and it doesnt matter what you get back. It matters more what you pay, even though you cant see it.

EdInvestor

dunstonh wrote: »

Cannot see anything about turning 1.5% into 1.7% and calling it double.

Here's the original FSA report for anyone interested.

http://www.fsa.gov.uk/pubs/occpapers/OP06.pdf

I think dunstonh must be getting confused by the total expense ratio (TER).The TER includes the annual managent charge (AMC) and a couple of other small charges such as custody fees.

But it doesn't include the "implicit (hidden) charges. These are the fees and costs incurred when fund managers buy and sell shares. They include

Bid offer spread
Price impact
Broker fees
Stamp duty

It is difficult to estimate how much these are, as they differ for each fund, but one way to work it out is to look at the portfolio turnover.For a typical fund James finds these implicit (hidden) cost add about 80% to the fee total. For some funds it will be much more.

This matters because over a long period of say 25 years saving for a pension ( or drawing down income in retirement), fees of 2.5% will cut your returns in half. :eek:

dipsomaniac

these fees are not hidden, you will find them detailed in the managers reports.

the most important charges are the initial charge and the annual management charge, the smaller charges are lumped together. you don't ask how much the steering wheel costs when buying a car.

some of the fees/charges are regulatory that are levied to protect the investor such as custodian fees, fsa fees, auditors fees etc. these fees will apply to every retail fund. stamp duty is more difficult avoid unless you use derivatives/bookies.

the most important investment decisions are not neccessary fees but diversification and the choice of manager looking after your investments.