I had more than 6,000 different company shares in total (held in multiple funds) and we then focused on the smaller holdings or ‘comet’s tail’ of the list. I remember L’Oreal as an example, because it transpired that I owned £300 of shares through one of my European funds. L’Oreal is a great company but what if it was so great that it doubled its share price? That would be a spectacular result for any stock but because my holding was so small, such an increase would only impact my portfolio by fractions of a per cent – so it wasn’t worth it (no pun intended). Taking the example of the S&P 500 again, it covers 500 (big) stocks, so you’re limiting your exposure to investing in many (very) small holdings.
Most funds and platforms are a little vague when it comes to transaction charges. Some are better at declaring the total monthly charge for managing your pension but how many transactions are happening each day in relation to your holdings? I didn’t have a clue. Dealing costs are comparatively small but having no visibility of how many transactions you’re making is a cost that’s out of control. Against trackers, some ‘buy and hold’ funds will have significantly fewer transaction costs but the fee for the fund manager usually outweighs this. Similarly, large funds have a larger number of clients to spread the fees over, so costs can be lower. It’s still not totally transparent but some of the tracking apps (discussed in Chapter 8) do pull this information through, which I find more helpful than trying to extract directly from a provider’s website. It varies by platform but I can see transaction charges of around £100 a month for my investments and although I’d like them to be less, I’m reconciled to the fact that I do need to pay for the service they’re providing.
Diversification
Next, let’s look at diversification. There are two threads here – within your investments and for investments generally. Simply put, you don’t want to put all your eggs in one basket, so it’s a good idea to spread the risk. I’ve talked a lot about the S&P 500 and that’s because it’s a massive economy, hosting many major (but varied) global companies. The FTSE also lists many significant companies, so I do hold a couple of different trackers to give some geographical spread and, because I have a slightly adventurous streak, I also have some money invested in an emerging markets fund to capture some of the tiger economies of south-east Asia. Having such a spread is sensible but it’s important not to get tempted to add just one more fund covering a slightly different sector because, before you know it, you’re back to square one.
The second thread relates to liquidity, or how quickly you can convert your investments into cash. It’s all well and good having a huge pension pot but not so good if you’re unable to afford an emergency bill or cover a period of unemployment, so it’s helpful to have a diverse range of investments and not all the same type. Pensions are straightforward as they’re tied up until you’re 55. ISAs are more readily able to be converted into cash and although you’d lose that year’s tax-free benefit, it’s not a deal breaker. Cash is obviously liquid in that it can be spent immediately but that depends on attractive interest rates being available. It’s always good to have a cash buffer of 6 to 12 months’ worth of general expenditure and my favourite way of doing this is through Premium Bonds. It’s true that the ‘interest’ (prizes) isn’t guaranteed but there’s a fair chance of winning a prize (sometimes a big one) and statistically it’s comparable with market rates so in my opinion, it’s a better bet than the lottery.
The other common investment is property, or second properties and BTL. If you have a mortgage, it’s likely to be your biggest investment, at least in the early years before your pension starts to accumulate. Shortly after getting married, we considered buying a rental property and took advice from my pension provider during an annual review. Their comment was that we already had a significant chunk of our potential wealth tied up in a property so would we be comfortable securing more debt, particularly as we were planning to move jobs and were a little unsure where we’d end up. This brought up the subject of liquidity and that it would be slow to release the capital out of a second house. It was through this discussion that we migrated towards a strategy of paying off our mortgage debt as quickly as possible over buying another property and equally contributing into both pension and ISAs. Having a quick look at our current spread, we have 50% in our pension, 38% in property, 10% in ISAs and 2% in cash and Premium Bonds. This isn’t a specific target to aim for but it’s a useful ratio to track once you’ve set up your plan. We haven’t looked for the ‘magic bullet’ or utopian solution to investing but the approach we’ve taken to our spending and financial decisions has led us to the position we’re in now.
Background research
I believe that several of the topics I’ve covered will be applicable and/or helpful to set you on a path on a better understanding of your finances, help you build a plan and have the confidence to make good decisions. But outside this book, where can you get more information or advice? Many investment platforms (for example, AJ Bell, Hargreaves Lansdown, Vanguard) provide interesting, unbiased and well-researched articles online, many with email bulletins. I’d suggest reading a range and picking the provider you prefer. I don’t want to force you into reading the Financial Times every day (I certainly don’t) but having some awareness of trends and movements in the markets is a good thing and it’s going to be easier if you’re comfortable with the way it’s presented. Although more old fashioned, the traditional Sunday newspapers normally have a financial section that’s not too heavy going and provides a reliable source of background information.
What I’d try to avoid are articles or posts that promote a share or investment tip with a catchy headline such as ‘My inflation-resistant FTSE stock everyone should invest in’. It’s far too tempting and, before you know it, you might be hooked on an extremely diversified portfolio – I know, I’ve been there. At Christmas, keep an eye out for financial journalists’ stock tips for the year ahead and reviews of the previous year’s predictions. If anything, it will underline that there’s no such thing as a guaranteed investment. In all my years of reading these reports, I’ve never come across an article that reported 100% success.
There are also regular articles on poorly performing investments or ‘dog funds’. Given that there are so many funds available and returns are variable, some are going to be at the bottom of the league table and there’s always a selection of big brand names on the list. This doesn’t really help you unless you happen to have an underperforming fund but the gist of my approach is not to major on managed funds but stick to low-cost trackers. However, it serves to underline the point that ‘expert managers’ aren’t infallible. Even fund managers who have a sound investment strategy will have periods when the market goes against them – but don’t jump ship after one poor set of results if you believe there’s a sound basis behind the investment strategy and external factors that are impacting short-term performance can be overcome. Remember you’re investing in the long term and don’t try to time the market.
Where to invest and fee structures
We’ve touched on investment platforms, so let’s address where and how you invest. If you’re in a company scheme, you’re stuck with their provider but when you’re consolidating a number of old schemes or want to invest in your own SIPP, you need to choose a provider. Whichever one you choose, three things are important to consider: how much advice or support do you want, how big an investment range are you looking for, and what are the costs? You can usually find articles that rank platforms by cost but this isn’t the only factor to consider; if you’re comfortable making all your investment decisions, then the cheapest no-frills option could be the one that works for you. If you want a bit more support and advice, you’ll have to pay for it.
Hargreaves Lansdown – a company I’ve been with for 25-plus years – are in the middle of the cost table. I can’t recall why I chose them but they provide a usable interface, have particularly good supporting information and, while some argue their services are a little expensive, I can live with that because it’s through their advice that I’ve built a significant pension pot. Without their content, I don’t think my portfolio would be where it is today. I can invest in almost anything, which I like, despite it contributing to my highly eclectic portfolio!
While trying to rationalise my investments and migrating to simple trackers, I moved our ISAs over to Vanguard, a low-cost platform. I also transferred my last company pension as I wanted to trial their ‘standard’ pension package, given that I was nearing being able to draw from it and it felt right to be in a more structured fund. Both the tracker and pension (LifeStrategy 100% Equity) have performed well with low fees, which is a great result. The downside is that I can’t invest in shares directly but the range of funds and trackers is great for a standard portfolio.
We’ve moved Lou’s pension over to St James’s Place, which is often cited as an expensive option and, by many, overpriced. They are also often the brunt of negative press articles. Given what I’ve written about the confidence in our financial decisions, this choice might surprise you but I can explain the logic. I often read on forums how easy it is to select and track your investments and how you’d be stupid to select one of the higher fee options, but pure investing is not the sole consideration, particularly as you approach your later years. After decades of self-investing, we hit the point where we were able to start drawing down from Lou’s pension. While you can figure it out for yourself, we felt it was time to pay someone else to do the administration and give advice. We’ve also been impacted by both our mothers being diagnosed with dementia and the realisation that, despite our current confidence, at some point we’d need support in managing our finances. We felt it was time to engage with a financial advisor who we could get to know and develop a relationship with for the remainder of our investment time frame.
I listened to an interesting podcast discussing this very subject (TRAP 2023) – how much should you pay for advice? They used the analogy of going out for an anniversary or birthday meal. You’d want to go to a high-quality restaurant where the food was fabulous and you’d expect to pay a bit more for the experience. Therefore, when you’re looking for financial advice, the question is do you want Michelin-star quality or Wetherspoons? Don’t get me wrong, we love our local Wetherspoons and visit regularly – but not for special occasions! We’d hit a time in our investment cycle when we needed to have the support of a trusted advisor who could help with executing our retirement. Timing was key in our decision making – we’d been managing our portfolio perfectly well but knew we might not be able to in the future and took this decision to de-risk our later life.
When you start investing, the total fees are relatively small but they’ll grow alongside your investments, so I’d suggest that, for the most part, you can replicate the basics of our low-cost model. But there will come a time when you want some advice and, if this is combined with a financial platform, you should mentally separate the fees from the pure management of your investments. Included in those fees could be a full financial health check every year, administration of our pension ‘payroll’ plus ad hoc advice ranging from capital gains (for example, selling a second property) to whether it’s more tax efficient to spend from our ISA or withdraw more from the pension. We still have other investments in low-cost products but we can also tap into an advisor to help manage our plan as we get older. It was the right decision for us but there are many options and it’s important to find a solution you’re comfortable with. Not least, you have to be clear about your plans and aspirations and not accept a cookie cutter solution. We have a great relationship with our partner at St James’s Place and regularly quiz her on all manner of financial questions, but most important is to find a solution or partner that you’re comfortable with, and that you’re getting value for money against what you need from them.
We researched three financial partners before making our choice and each had a different approach to fees. One quoted a straight 2.5% take-on fee to accept the portfolio, in addition to a regular management charge, which is a whopping £12,500 for a £500k pension pot. Another did a full financial analysis and cash flow modelling exercise as part of the pre-sales discussion, which was ours to keep (for free) and five years earlier had cost us £2,000. The final one didn’t charge any take-on fee but there was a tie-in clause that would be payable if we left shortly after joining, on a reducing scale from 5% over a five-year period. Two quoted the sales gimmick, ‘Our annual fees are usually 4% but for you, we’ve agreed 2.5%.’ It’s a big decision, not to be taken lightly, but beware of big fees. If you’re starting from scratch, opening your first SIPP or ISA, there will be limited charges and fees will grow proportionally as your investment grows. The time to be cautious is when you’ve built up a reasonable pot and you’re being asked to pay to transfer it somewhere else. Make sure you understand why you’re moving and what you’re getting in return. Yes, there are some costs involved in transferring investments and ultimately the recipient company is going to profit from your ongoing fees. I’m not a big fan of upfront costs to move but I understand such pricing structures are in place partly to offset the cost of pre-sales activity (ie advertising and spending time with you before you sign up).
Fee structures and transparency are an ongoing and contentious issue and there’s no easy answer as to what’s going to be right for you. However I’d go back to a previous theme of knowing exactly what you want, being comfortable with what you’re being offered and whether it’s right for you. For example, we had two criteria for moving some of our portfolio over to a paid-for service: one, would they handle the drawdown administration of Lou’s pension and could they provide other, related investment advice; and two, did we like them and were they younger than us? Putting it bluntly, we didn’t want them to retire or die before we did!
I’ve touched on financial advisors several times and it’s right to consider them again. One piece of analysis they’re likely to do (you can also find an online tool to do it for you) is related to your attitude to risk. Generally, it follows that bonds are lower risk (caveat some of my earlier comments) and shares are higher risk, so advisors will aim to match a portfolio to your appetite for risk.
Final thoughts
Our investment journey hasn’t been perfect. We’ve made mistakes, losing money on some investments, so what I’ve learned is that it’s important to recognise when to cut your losses and sell. It’s the reverse of a concept called ‘in for free’ that a colleague and I used to use when we started investing in penny shares back in the 1990s. If we bought a share and it increased in value, we’d often sell our original stake, including fees, so we didn’t make a loss but still had the residual invested ‘for free’. Therefore we felt we had a pot of what was essentially free money and if another investment tanked and we lost the lot or had to sell at a big loss, we could offset this in our own minds against the ‘free money’ so we didn’t feel so bad. It’s OK to have an investment every so often that doesn’t work out. There are many external factors at play, so just aim to be well informed and get out when you know you’ve lost and try not to repeat it too often.
I also acknowledge that we’re not at the end of our financial journey and, while I don’t tinker with my portfolio as much as I used to, I’m still tweaking what we invest in. Two years ago, we decided to differentiate our investments by different strategies to see which really is the best solution. Broadly we have:
my ISA in a Vanguard World Index Tracker
Lou’s ISA in a Vanguard S&P 500 Tracker
my original eclectic Hargreaves Lansdown portfolio
Lou’s pension with St James’s Place, who manage her pension payroll and provide advice and have produced a portfolio based on Lou’s risk profile and drawdown requirements
my old company pension pots transferred into Vanguard LifeStrategy 100%
a general investment fund (we ran out of pension and ISA opportunities) invested in 50% S&P 500, 30% FTSE 100 and 20% emerging markets (all trackers)
Premium Bonds for our emergency cash fund.
As you’ll see in a later chapter, the results are variable. They don’t consistently track up and down with each other and have wide-ranging performance month on month. I even track the performance against key indices (World, S&P 500 & FTSE All-Share) and there’s little correlation there either! Some months we beat the market, other times we’re a little off and sometimes it’s a mix across all of them. The only key trend is that overall, our portfolio value is slightly increasing. Which, given that we don’t work, is a great result as it means we’re withdrawing and spending less than the monthly investment returns.
There’s an emerging trend to use artificial intelligence (AI) or ‘robo-investing’. As technology has advanced, it was almost inevitable that at some point someone would use data and algorithms to replace the traditional fund manager to make investment decisions. These are now appearing as low-cost options to invest in, and in some cases, the results are good. However, it’s too soon to be able to say whether they’ll be able to deliver a consistent performance over five years, so at present, I’d still propose that the ‘automated’ tracker approach is best but I’ll be watching this space with interest!
Key takeaways
When possible, make additional contributions to your workplace pension, particularly if your company will match them.
Fund managers can’t guarantee performance and their results vary considerably. One exception is Warren Buffett, who famously showed trackers could yield better results, hence my strong preference for tracker funds.
Trace your old pensions and transfer them into a SIPP provider and either invest into their standard pension offering. If you’re under 50 I’d go for the highest risk option (the percentage of shares/funds over bonds) as you potentially have another 15 years of returns to come.
Build up your rainy day fund (up to 12 months spending) in Premium Bonds.
Invest in your ISA; if pushed I’d suggest a low-cost tracker, either a world index or the S&P 500. At this stage go for accumulation funds over income.
If you can, drip-feed into your SIPP and ISA, even a small amount per month.
Track the value of your investments over at least a year and get comfortable with it going up and down in value.
