How you can take control of your investment decisions
As a species, we are very obedient, particularly when it comes to marketing. We are easily persuaded when the information being presented to us comes from a figure of authority or an expert. When you combine this with our brain’s desire to react automatically to the information before us, rather than process it deliberately and carefully, we tend to make snap judgements – often to the marketer’s benefit. How does this impact on your investment decisions, lets find out….
Let’s put the ‘fast and slow’ thinking to the test:
A bat and ball cost £2.40
The bat costs £2 more than the ball
How much is the ball?
Your fast-thinking brain will say the ball costs 40p. Are we right – and be honest!
However, if you’d taken the time to deliberately process the question, you will have eventually come to the correct answer that the ball costs 20p.
The same can be said when viewing performance figures and charges that asset managers report about funds and portfolios in the investment world. Clever marketing can show an investment fund or manager in its best light when the actual performance delivered to clients can be very different.
However, our desire to want to believe credible experts means we might not always see things as they really are.
Of course, we are not suggesting that companies deliberately mislead prospective and existing clients. What they will do is present themselves, and the information they have, in the best light and our fast-thinking brains might not always be quick enough to see beyond it.
Here are a few points to be aware of so you can sit and deliberately think about the best place to invest your money.
- Charges
Often discussed and debated by the press, fees and charges applied to your investment products are an interesting point. There is a vast array of them.
- Financial Adviser fees – these can be a % of the amount you invest or a fixed fee.
- Fees charged by the company providing the product – e.g. an ISA provider. These are usually a % of the amount you invest. Quite often these companies also apply a flat or fixed monthly fee in addition to the annual %.
- The company managing your investment – these are usually a % of the amount you invest.
- Transaction fees – the investment manager looking after your money will use a broker to access the investment markets and fees will be applied for every share they buy and sell that is held within the portfolio where your money is held. This will be a % of the transaction and for a portfolio of £1 million can be around £7,000 to £10,000 a year.
- Custodian fees – the broker your investment manager uses will also charge a custodian fee to cover the cost of holding the shares in the portfolio. This is to cover administration costs such as dividend declaration and distribution and is normally a % of the amount held in each share.
It is important to remember providers headline with statements like “we only charge a 0.5% annual management fee” but that is not the full story. Investors should be careful to make sure they know ALL the charges that will be applied to their investments by ALL parties involved in managing it.
That said, you need to also look at the returns achieved. If you paid total charges of 5% in a year to get a 12% return after all fees and charges, that isn’t a bad deal. What wouldn’t be a good deal is paying 0.5% in charges only to get a net return of 5%.
It’s all relative but don’t let you fast thinking brain tell you that a 0.5% management fee is automatically better than a 5% one!
2. Performance Figures
Performance figures are probably the main focus for investors and an area they need to tread with caution for a number of reasons.
Past performance
Often, investors select a company or product because it has performed well in the past. Just because a company did well last year, does not mean it will repeat those returns this year or even in the future. Likewise, for a company that has been outstanding for 5 or 10 years, past performance is just that…in the PAST.
Clever marketing
This allows a company to display its performance data in many ways to give a better picture. For example, if the figures shown are from March to February, how does the picture alter if you consider January to December?
Sometimes, what you have been told and what you have been shown can be very different. A fund manager may tell you for example that the gross return is 2.5% before charges but the net past performance figure shown is actually 0.7%.
Avoid making decisions on half the picture
You must always try to look at the full picture. If a company did well last year but poorly over years 3 and 5, what was the reason? Are things improving with the portfolio itself or was it just that the markets in general did better last year?
It’s worth noting that if a fund that grows too large, which might seem like a good thing, it can become unmanageable and therefore performance will be negatively affected.
Compare similar products
Make sure to compare funds in the same sector or of the same type. Comparing a North American fund and a UK Corporate bond fund is pointless: they are vastly different in risk and performance potential. Likewise, don’t compare a UK equity fund with a Discretionary Investment manager – they will likely do very different things in their investment style.
Timing
Timing can alter the picture significantly. An investment manager may proudly tell you that over the last 13 years their fund has grown by X% – which is not surprising as starting investing in 2009 would have been a very fortunate decision as markets were at the lowest seen for some time. If you change that picture to 15 years and you invested at the highs of 2007, the results can be very different.
- How you can take control of your investment decisions
When you’re not an expert, particularly in something that can seem as complicated as investments, it’s easier to want to trust in the authority figures. However, there are steps you can take to ensure you have all the information you need to make an informed decision and not just go with what your fast-thinking brain thinks is the best option – because remember, that ball did not cost 40p!
- Never make an investment decision based on single sets of data or limited information – look at the whole picture.
- Look at what an investment manager has done over a long period, if you see periods of poor performance ask what happened then.
- The investment industry is more transparent than ever but that only requires companies to display necessary information. How it is displayed or put across verbally may not be a true reflection of the full picture.
- You should never make an investment decision based on past performance or charges alone. Charges, performance, the strategy or style of the manager, investment or market sector, the current position of investment markets and the economy are all important.
- Don’t accept the adage “it’s time in the markets that matters” because there are countless examples proving this is completely wrong and simply used to encourage investors to stick with the investment manager no matter what happens – beware the asset gatherer company who just wants your funds to boost their annual fee income.
At Middleton Private Capital, we will never charge our clients an annual management fee if we don’t achieve a minimum net return of 2.25% above the Bank of England base rate. (See our website terms and conditions for more details).
If you are thinking about investing or would like help managing your investments in the future, we would be delighted to discuss what we do and how we do it.
Click here for more information.
Middleton Private Capital Ltd is authorised and regulated by the Financial Conduct Authority, No. 804197. All investments contain risk, the value of investments can go down as well as up and investors should be aware they may not get back the full amount invested.