Are you unknowingly harming your future financial health by making some simple mistakes?
As investors, we make informed assumptions and judgement calls based on the information available to us at the time, but many investors still make some common mistakes. It happens to us all; we sometimes don’t realise the consequences of financial decision-making and dive head first into the unfamiliar world of investing without a lifeguard.
In this blog, I will highlight the three biggest mistakes that investors make and how you can address them. From grasping the true impact of inflation, to being overcharged, to not knowing your number, these big mistakes can be avoided and rectified before it’s too late.
1. Misunderstanding Inflation
People are often under the impression that the only option to maximise their money is to rely on underwhelming bank interest rates and safe bond investments. This is not true. Inflation in the UK averages about 3% each year, therefore any interest your savings do generate in a bank account will ultimately equate to zero (or less).
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”Robert G. Allen
Inflation is diminishing the purchasing power of the pound. For instance, £10 today will inflate to £11.59 in 2024, and in 40 years’ time that same £10 is predicted to balloon to £32.62. This isn’t just a recent phenomenon, the price of a 1st class stamp in 1972 when I was born was 3p. It’s 70p today.
How on earth are we going get through this type of price inflation if we are stuck in cash deposits, or bonds that have done a similar 5% annualised in the last 60 years against inflation also at 5%? Large-cap equity markets have done 10%. Small-cap 15%. Value-cap 14% all over the same period. So, what are the basics of portfolio investing we should be following to tackle this?
The Basics of Portfolio Investing
In my experience, lots of people out there have a mixed bag of what appear to be conflicting investment strategies. They are all firing at each other in different directions, suggesting that whoever put the structure together doesn’t really have an investment belief system to underpin their advice. In many ways it’s farcical, given the large sums of money being dealt with.
“The stock market is filled with individuals who know the price of everything, but the value of nothing.”Phillip Fisher
I don’t say this to be critical of other advisers, but it’s clearly evident that quite often a lot of ‘stab in the dark’ type fund selection is going on within our profession. It’s amateurish and takes me back to the days when I was ‘selling pensions’ at Barclays in the early 90’s, where we had ‘managed pension funds’. We just ticked the box, so to speak, and added management fees.
Instead, it is my belief that investors should have a truly diversified portfolio. Rather than picking funds from the current ‘list of the month’, investors should simply back large-cap, small-cap and value-cap equity markets, in their entirety, throughout the developed world. This should then be repeated in the emerging world. This gives full market and geographic diversification. Investors should avoid backing individual funds and managers with stars or other ratings just because a ‘ranking publication’ out there says they are the holy grail and way forward. All fund management charges and any other costs that are present should be shown clearly, so that the client can understand what they’re paying for and ensure they’re getting value for money.
Risk & Reward
While investing in bonds generates reliable returns for investors preferring a regular fixed income, you won’t stand much chance at reaping significant rewards without introducing some element of risk. However, by investing patiently in a properly diversified portfolio of overall investments over the next 40 years or so, you can sit back and ‘ride out’ the peaks and troughs of the markets. Investing is a long-term financial strategy – if it was a ‘get rich quick’ scheme there would be no need for financial planners and I wouldn’t be writing this!
Real financial planning should free you from the stress of watching the FTSE and other markets on a regular basis and guide you towards targeting more personal goals. We shouldn’t be concerned about the interim fluctuations of the markets – instead, as your financial planners, we should focus on supporting a lifestyle that you can aspire to and then maintain that lifestyle throughout a goals-based retirement which may span 30 or more years.
2. Investment Fees
The second mistake most of us make concerns advisory fees. Are they really justified, given the nature of the services being provided? Sadly, the transparency of big financial institutions is lacking, and quite frankly marred by their poor client service. Sure, advisers like myself and others need to make a living, and our expertise does in fact reflect real value in our client’s lives, but how much should you expect to pay?
For arguments sake, let’s say you invest £100,000 over 40 years. Let’s assume it’s a one-off capital investment. A common annual management fee of 0.75% is just the beginning. On top of that there’s a platform fee of about 0.35% and an average adviser charge of 0.82%. Initial adviser costs per year come to 0.24%. Moving on, we have fund custodian and administration costs, which equate roughly to 0.17%.
As well as this, there are further transaction costs. Depending on how much trading your fund manager chooses to do, these could be absolutely anything, which is the issue. You really are kept in the dark here. We will go with the average industry figure of 0.41%. In summary, the average cost of investing is in the region of 2.74%.*
Doesn’t sound too bad right? After all, most financial advisers don’t increase their fixed percentage year on year. But we haven’t yet factored in compounding. What is compounding? As an investor, where fees are concerned, this is possibly the most devastating word you can hear.
You don’t pay this percentage of fees just once. Instead, it is applied year after year and takes into account the gains you are making on your investments. As the value of your investment grows, so do the charges. This drastically impacts the value of your return over the lifespan of your investment.
Compared to the industry average of 2.74%, at Wilcocks & Wilcocks our fees average 1.3%, meaning the difference we make could effectively double your return in comparison to other wealth managers. How? Well, instead of having your annualised return of 8% taking an immediate hit of 2.74%, leaving your actual real return at 5.26%, your return with us would look more like 6.7%. This may not seem like a substantial difference on paper, but the impact of saving around 1.44% in fees will save you a significant amount in the long run. Here’s why:
Going back to our example, after 40 years you’re finally ready to retire, and the £100,000 you invested has been growing, with the interest compounding yearly.
If you were to pay the industry average 2.74%, so getting a return after fees of 5.26%, you’d be left with £777,203. A sizeable sum, which might look pretty healthy until you consider that you would have paid a whopping £1,395,249 in charges over this period.
Now, swap in our fees of 1.3% on average. With Wilcocks & Wilcocks, your final value would be £1,338,372. You don’t have to be a rocket scientist to figure out that the difference we make would have saved you £561,168 – over half a million pounds that you could put towards your retirement. That’s the power of compounding fees.
What is responsible for such unreasonably high fees then?
Layers of Management
Large corporations are deceptive when it comes to layering their costs. These are craftily hidden between layers of Field Sales Managers, Sales Managers, Area Directors, Boards of Directors, all of whom are all being paid by the client unnecessarily.
Essentially, you are contributing to a whole spectrum of multi-layered managers who are funding their lavish lifestyles at your expense. (Read more about this problem in my recent £64 Billion Investment Scandal blog).
At Wilcocks & Wilcocks we believe that investment management should always be at a fair price, and in most cases our clients pay around 1.3%, which includes our fee along with fund and platform costs. We are committed to providing you with the most personal and professional service available. This could mean the difference between retiring at 60 (or even earlier) versus retiring at 65.
Don’t be a victim of overcharging. This is part of the reason why so many people have lost faith in the financial industry and it gives hard working family firms like ours an undeserved reputation. We exist to help you achieve your future ambitions with the help of sound financial advice for a fair price. Our only goal is to see you increase your wealth to enable you to live out your best life. If people didn’t trust in our values and integrity, we simply wouldn’t be where we are today.
3. Not Knowing Your Number
The final big mistake that investors make is a simple one. Not knowing their number. How often do we take a second to ask ourselves how much money we actually need to live out the rest of our lives? We need a target, a figure, a goal to aspire to, so we can set our sights on an endpoint.
Planning what you need to get through your future is crucial. We often budget our lives and estimate the cost of things such as holidays and new purchases, so why should it be any different when it comes to retirement? If anything, it should be more important. Not knowing your number can leave you feeling muddled and unclear.
For more insight about this take a look at Robert’s recent blog, Know Your Number.
Plan Don’t Dream
With rising living costs and greater life expectancies, you’ll likely be looking at preparing for a 30 to 40-year retirement. Imagine never having to worry about running out of money. Our investment strategy is proven to work over 6 decades and is designed to take our clients through this window of retirement.
Having worked with clients over the years, it is amazing how much their sense of financial wellbeing improves as a result of determining their number early on. Those of us reaching the pinnacle of our careers are able to plan for things we never thought we could afford and secure wealth for the rest of our families.
“It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”Robert Kiyosaki
If you find yourself struggling to meet your number after a financial analysis, don’t hesitate to begin seeking support. We can review your current plan and, if necessary, construct a new one to suit your financial requirements.
At Wilcocks & Wilcocks, we can offer you a far more sensible investment solution based on evidenced-based research. We provide investment solutions with goal-aligned plans, at a low price. Contact us today through our online form or call 0845 200 4041 to arrange a free consultation. We can provide an in-depth portfolio review and independent analysis of your investments, to show you what you are paying now and how we could potentially save you thousands of pounds per year.* Research figures based on calculations from the True and Fair campaign.