Out with the old-fashioned IFAs of a bygone generation.
August 17, 2021
Out with the old-fashioned IFAs of a bygone generation.
The average UK equity fund was down around 10% last year, the average return on The Portfolio Platform was up over 50%.
An IFA will charge you between 1.5% and 2% for investments by the time you’ve paid all the added fund costs. It used to be more but as with everything else, the power of the internet has brought prices down and opened people’s eyes to a more competitive market.
So, what are they doing for that money? The first thing they do is put your information in a generic model that will give you a risk rating. This number tells them exactly how to proportion your portfolio into cash, bonds, equities and alternative asset classes. This was designed so you can’t hold them accountable for…………anything really, and it means they actually have very little say as to what happens to your money.
Does that produce a rounded portfolio? Well, in the past it might have, but things change. Is it a portfolio that genuinely suits me personally? Absolutely not, and here’s why.
Let’s start with cash, and I’ll use my own ‘high risk’ portfolio from an IFA I used before I realised that I was wasting my money.
Cash 7% - why? Super safe? I guess so. But if they are charging me 2% on my portfolio what is the point of having 7% of the investment yielding absolutely nothing? Might as well put it under my mattress and keep that 2%.
Bonds – Government 3% and corporate 4%. I can live with the corporate bonds although I would like to know what yield they are getting because that is a pretty vague description. As for Government Bonds, where do I start? They yield almost nothing at all. In fact, some durations of government bonds are now negative yielding. This literally means that if you buy a bond and hold it till the end of its time, you are guaranteed to lose money, and yet investment managers buy them.
I realise this is considered a ‘safe haven’ when money managers don’t know what else to do with the capital but a 0% return on an investment that I’m being charged 2% for, makes no sense at all. In fact, I could have bought some German debt and lost the money myself (as I’m writing this a 5-year German government bond has a yield of -0.61%, why would anyone buy this?)
So, we’ve now covered over 10% of my portfolio and I haven’t made a single penny, in fact I’m down money, but it’s safe and this will keep the FCA happy. As long as money is taken away from the people and put somewhere else, they feel they are doing their job of condescending the non-professional market who don’t know anything.
With the ‘safe haven’ assets covered, my higher risk portfolio is mostly in equities; 70% in fact, and this is where we really are starting to see an investment revolution in the form of the retail trader, and once again, this has an impact.
I have kept a close eye on the rise of retail trading; anyone who follows our articles will be aware of this. Many online broker sites are now advertising commission free trading – no broker is actually free as I have explained before, but there is no ‘commission’ on the trading and this gets people in. This, and the fact that it can be done anywhere, anytime and on an app, makes it very inviting to the younger generation.
Is it any wonder that Apple shares have doubled over the last year, when a majority of retail traders are likely to be placing their trades on an iPhone? According to Vanda Research, in some weeks retail investors accounted for half of all trading in Apple shares.
It is time to start accounting for the new generation of investors and stop mocking them. Robinhood’s app was downloaded 3.4 million times in January alone. They are a force to be reckoned with, but the ‘old guard’ refuse to accept that. Charlie Munger, the vice-chairman of Berkshire Hathaway described them as having ‘the mindset of racetrack betters’. This is snobbish and elitist, and merely a case of one generation not understanding another.
Many managed funds missed the surge in equities last year because they were so sure it was premature. The number of times investors in the know said to me they were wating for the bottom, maybe they’re still waiting. But sadly, I’m afraid that ship sailed and it turns out the retail market was right and what an opportunity it turned out to be.
If you ignore the change, and don’t embrace it, you won’t see the bigger picture. The average UK equity fund was down around 10% last year, traders on TPP were up an average of over 49%. This is simply a case of the new guard replacing the old.
The risk profile of the new investor is much more adventurous too, and it turns out stock picking isn’t as hard as the city would have you believe. The motto of the Reddit crowd is YOLO, ‘You only live once’. This is the attitude of the modern investor and they are looking to make money. Why can’t investing be enjoyable? Just because it has always been symbolised by the old man in a pin stripe suit and a bowler hat, doesn’t mean it has to stay that way.
Investing has changed, investing desperately needed to change. A recent survey by Deutsche Bank suggests that retail investors intend to put 37 per cent of the forthcoming stimulus cheques into stocks. That’s an incredible amount. Rather than wasting it, they are investing it. Surely this is commendable? It has to be considered progressive; incidentally this injection into the market could be as much as $170 billion when it filters through.
However, there is one major concern with all of this. The Deutsche Bank survey also found that half of US retail investors were completely new to the markets in the past year. Given that 23 percent of all US equity trading last year was done by retail investors, that means that 11.5% of the US market, was in it for the first time, and much of it was leveraged.
Leveraging means you can buy more. Buying more makes prices go up. US margin debt reached $799 billion in January and to me, this seems highly reminiscent of how the sub-prime crises began. Overleveraging in the stock market is no different to overleveraging a house. As bigger mortgages were encouraged by lenders, prices went up. Now brokers are encouraging borrowing on margin to make equity prices go up. One thing is for sure though, there may be bumps along the road, but higher equity valuations are here to stay.
Those whining about how high equity prices are, will sound a lot like my generation complaining about house prices. The equity market is now available to everyone, which means prices will go up and as long as there is an appetite to buy, they will continue to go up.
We may well be seeing an investment revolution but it’s one that will benefit from education, guidance and the middle ground. We don’t want the silliness of the Reddit crowd, nor the boring stuffiness of the old crowd. It’s exciting to see the equity market becoming ‘trendy’, but it needs to be controlled or the consequences will be severe.
Enjoy your investment, but let the professionals help. The Portfolio Platform.
This article was written by Edward Davies of The Portfolio Consultancy. If you would like more information on how you can sign up to the platform, book in a call here. The Portfolio Platform allows you to simply connect your account to one of the professional strategies showcased. Once you are autotrading, you don’t need to do anything. Watch, and enjoy.
“TPP might just be about to revolutionise investment for the retail market.”
- London Stock Exchange 2020