12 - From Managed to D-I-Y

Thursday, 26th May 2016 16:44 - by David Harbage

In this article, the penultimate one of our series considering the prime types of asset available to long term savers, we turn our attention towards the potential help and advice available from professional financial advisors and portfolio managers, but particularly focus on – and suggest a few trading ideas for - the ‘Do-it-Yourself’ investor.

The extent to which we seek advice may depend on our human nature, but the wise person will acknowledge their ‘blind spots’ of capability or knowledge, and endeavour to become acquainted with the operation of a new product or service before committing their health or wealth. Whether it is in learning to drive a motor car or in constructing a plan for retirement, the newcomer should acquaint themselves with the ground rules (such as the Highway Code) or the nature of appropriate investible assets – if they wish to make progress and reach the desired destination, as well as understand the risks involved.

Accordingly, before formulating an investment solution, individuals who are not familiar with or qualified in financial matters should seek advice and, if at all interested in the subject, carry out their own diligence to gain greater comfort in the advised mix of assets or suggestions made by any so-called expert. Reading through these educational blogs might represent a good starting point, before further investigation via pertinent websites (such as the financial media) and books. As regards the latter, the writer would recommend straight talking, ‘Cotter on Investing’ published by Harriman House in 2011, which provides a lot of practical advice to both beginners and active traders alike.

Constructing a personal Balance Sheet (writing a list of assets and liabilities), and Profit & Loss accounts (detailing both monthly and an annual budget of anticipated income and expenses), can represent a helpful starting point to better understand your finances (consider dependents), decide on objectives (home, retirement plan, holiday, car, yacht) and determine how much you need or can afford to save. A prudent person will not need a financial advisor to spell out the merit of making provision for dependants (most critically life assurance, to cover mortgage debt in particular), making a will (to reduce future uncertainty, and perhaps mitigate inheritance tax) and to get into the habit of making regular savings for retirement (or other major anticipated expense, such as financial help towards university education, marriage or first home for children). After making reserves for shorter term anticipated needs or plans (such as replacing motor car or a holiday), the residual monies remaining (which could be termed one’s capital) can be allocated for long term savings.

The asset allocation process can now begin, weighing up the prime alternatives of Cash, Bonds (which may be viewed as longer term cash, on fixed interest rates or on terms linked to inflation) and Equities; accompanied, as the investor deems appropriate by property, commodities or other more exotic forms of investment. Taking advice (ideally from more than one source), but retaining control of the final decision (to ensure comfort with the eventual plan), would seem most sensible. Some financial advisors have advocated that an investor’s age should accord to their % Cash and/or Bond allocation, with the remainder of their wealth being invested into assets with potential for growth (in income, as well as capital) such as Equity and/or Property. On that basis, a 35 year old individual would put 35% of their ‘for life’ savings into Cash & bonds, and 65% into Equity & Property. This is based on a traditional view that as one becomes older, so the need for growth assets diminishes; in itself a debateable point, at a time when UK equity dividends can produce more income than cash or bond investment and, in any event, as the investor may wish to pass on these assets to the next generation. Whether one perceives the equity value within a principal residence as property investment is another, perhaps contentious, consideration but since any appreciation in a home’s worth is not readily realisable it probably should be disregarded within this exercise. Finally, on the subject of considering one’s wider finances and planning, a regular review – carried out at least every three years, to take account of changing personal and financial circumstances – is highly recommended.

In investigating the alternative individual types of, or vehicles for, investment in cash, bonds or equity – websites, both of providers (such as National Savings & Investment for cash, London Stock Exchange for retail bonds, and a huge array of stockbroker or IFA advisor sites for product comparison purposes) and personal finance (newspapers to specialist journals) will be useful. The latter should be independent, and therefore the information so disclosed is not tied to any one product or biased to any particular service provider; there are literally hundreds of comparison sites, as an example take a look at Moneyfacts.co.uk. Reading quality newspapers should ensure that investors stay appraised of current pertinent events, including prospective changes in taxation and other relevant legislation. Becoming acquainted with the allowances and rates of income tax and capital gains tax – as well as utilising any taxation reliefs available, notably offered by Individual Savings Accounts (ISAs) and Self Invested Personal Pensions (SIPPs) – makes good sense. As intimated earlier, it is important to try and eliminate ‘blind spots’ of one’s knowledge, in order to maximise the opportunity of discovering the best solution.

Turning to equity investment in particular, an investor who seeks to have monies managed should expect to pay for such a service - and possibly pay for the initial advice from an IFA too. Costs vary, according to whether the resultant investment solution is populated by low cost passive index tracking funds or a more active segregated portfolio, featuring individual bonds and company shares. The option of an advisory or non-discretionary portfolio management service – whereby the investor receives advice or suggestions, but retains a greater degree of control by ultimately making the decisions – is also offered by many banks and stockbrokers. Costs for this proposition will often be particularly influenced by the level of transactional activity. Prospective investors will need to consider the track record, albeit as a guide only, to future performance as well as the overall quality and capability of the financial institution who they appoint. Something that can be perceived by reference to its financial size and reputation, with local opportunity to meet management, breadth and depth (geographic, security/fund size, independence) of research capability in various asset classes, levels of bespoke care and the extent of the administrative service (online view) would all be high on any tick list of essentials.   

Turning towards the self directed or DIY investor, their wish list from a financial provider will not be dissimilar, but probably feature low costs and dealing capability towards the top. Online brokerages (offered by banks, such as Barclays Stockbrokers or TD Waterhouse, or smaller organisations) have become increasingly popular amongst both traders (for cost, as well as ease of use) and private individuals seeking to make their own investment decisions. Certainly dealing costs (notably commission) have fallen over the past decade, and these brokers are having to provide more technologically sophisticated platforms to facilitate a wider range of securities or other financial instruments - such as Contracts For difference, known as CFDs - which enable an investor to ‘go short’ (that is place an order to Sell) or adopt a geared financial position, than traditional stock market investments would allow.

As one might well appreciate, using futures, options, CFDs and the like can be a means of reducing risk, rather than necessarily increase it – but is probably a bigger subject than this blog’s immediate objective. Certainly interested private individuals are joining professional traders in making ever greater demands for helpful pc programmes and other tools to help them manage money more effectively. In the next article we will conclude this series of educational blogs by making a number of suggestions in regard to managing and trading stock market securities, and equities in particular.

David Harbage

26 February 2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.