Average Rate of Return?

Prism

If you are thinking of taking some income from your investment then 3.5-4% is probably a better starting point to ensure that the income has room to grow with inflation. The fund value itself will may well drop too over the years. Also, consider charges (platform and fund). I try to stay under 1.5% in total for those. You may also have tax to pay

[Deleted User]

Prism wrote: »

Also, consider charges (platform and fund). I try to stay under 1.5% in total for those. You may also have tax to pay

That’s too much. If someone is drawing down 4%/year, he would be paying 5 months’ worth of his annual income in charges.

Prism

Deleted_User wrote: »

That’s too much. If someone is drawing down 4%/year, he would be paying 5 months’ worth of his annual income in charges.

Thats not the right way to look at it, if the returns are good. Anyway, thats roughly what I am paying as a maximum and I am doing just fine. If you use a good platform and good funds for less then thats fine too.

beamyup

You cannot directly control how well the markets do in future, however you have direct control over
1) Charges, keep these as low as possible. My target is 0.4% in total
2) Asset allocation, simply how much you want to put in each asset class. In simple terms how much in equities vs how much in bonds.
3) Investment period, how long you keep your investment before changing it.

The only certain decision you can make out of the three above is 1) Charges. Charges eat away an extraordinary amount when calculated over the long term. the difference between 0.4% and 1.4% in charges does not sound like much but over 25 years you will lose 1/2 of your gains.

e.g.

£100k invested with 0.4% PA charges over 25 years with 6% investment return = final value £390K (£39K of charges)

£100k invested with 1.4% PA charges over 25 years with 6% investment return = final value £308K (£121K of charges!)

£100k invested with 0.4% PA charges over 40 years with 6% investment return = final value £884K (£144K of charges)

£100k invested with 1.4% PA charges over 40 years with 6% investment return = final value £604K (£424K of charges!)


There are 3 areas of charges to consider:
1) IFA can cost you 0.5% - 1.5% PA, DIY costs nothing.
2) Platform - you can get better deals for bigger portfolios. e.g. 0.25% for 100K is easily achievable, keep your investment transactions to a minimum e.g. 12 per annum if you invest monthly.
3) Fund - Passive funds that are diversified across asset classes, geographies are available for 0.11% to 0.25% from many providers.

Attempts to time the market (buy low sell high) and to beat the market (by paying IFA to do this and/or using active funds) are generally considered futile and can easily increase your charges.

dmelife

Beamyup assumes that the only differential between funds is cost and therefore the cheapest fund will always deliver a higher return than a more expensive fund which is simply not true. He is right that platform and adviser charges will reduce returns but again he assumes that there is no difference in returns between a portfolio that the average DIY investor builds and one that an IFA builds. In some cases this may well be true but in others the IFA will be able to increase average returns. Cost may well be one thing that you can control, but it is not the only consideration.

beamyup

dmelife wrote: »

Beamyup assumes that the only differential between funds is cost and therefore the cheapest fund will always deliver a higher return than a more expensive fund which is simply not true. He is right that platform and adviser charges will reduce returns but again he assumes that there is no difference in returns between a portfolio that the average DIY investor builds and one that an IFA builds. In some cases this may well be true but in others the IFA will be able to increase average returns. Cost may well be one thing that you can control, but it is not the only consideration.

Correct, that is exactly what I am assuming. Actually according to the research I am probably being generous to the active funds by using that assumption.
I quite like the S&P analysis
https://us.spindices.com/spiva/#/reports

The interactive graphs are nice but the "persistence scorecard" is the most insightful analysis
https://us.spindices.com/documents/research/persistence-scorecard-march-2019.pdf?force_download=true

If IFAs are ignoring the facts and/or not sharing this type of analysis with their clients (there is a lot more of it than this!) then .. why?

It's not all IFAs, I have met an IFA who does believe and share this idea with his clients.

PS I know that the UK active funds are SLIGHTLY better than the US active funds at the moment.

Linton

beamyup wrote: »

You cannot directly control how well the markets do in future, however you have direct control over
1) Charges, keep these as low as possible. My target is 0.4% in total
2) Asset allocation, simply how much you want to put in each asset class. In simple terms how much in equities vs how much in bonds.
3) Investment period, how long you keep your investment before changing it.

The only certain decision you can make out of the three above is 1) Charges. Charges eat away an extraordinary amount when calculated over the long term. the difference between 0.4% and 1.4% in charges does not sound like much but over 25 years you will lose 1/2 of your gains.

......

Asset Allocation is by far the most important decision in your control. It is the main reason why one fund is different to another. There is much more to Asset Allocation than shares vs bonds. There is geography, big vs small companies, sectors, growth vs value, other assets such as property, infrastructure, commodities, foreign vs UK bonds, government bonds vs corporate bonds etc etc.


To take one simple example - VLS100 vs HSBC MSCI World ETF. Both funds invest in large companies from developed markets. The largest difference is the asset allocation with regards to %UK. The MSCI World ETF has outperformed VLS100 every single year for the past 5 years (only 5 year data is readily available) by an average 2% per year, far more than the difference in charges of under 0.1%.

beamyup

Sure asset allocation is important but nobody can tell which asset category is going to be best in terms of risk Vs reward in the future.

You cannot control that. But you can control charges.

Prism

I do use asset allocation to try and boost equity performance but not traditional regional or sector splits. Low volatility vs high volatility (low is historically better), large + small with rebalancing, emerging market % allocation. All of this can be done with active or passive funds even though the charges are higher - typically about 0.3% for passive and 1% for active.

MarkCarnage

Deleted_User wrote: »

5% real return on a balanced portfolio is quite modest by historic standards (assuming you can keep the charges low). As for the future... Who knows?

5% real return may be close to what equities have achieved historically, but not on a balanced portfolio, whatever that might mean.

I suspect that 5% nominal return for equities forward looking might be challenging enough after costs.

Historic returns from 1980 until now have been inflated by a huge decline in bond yields which is not repeatable.