If you want to get rich as a smaller investor entering the market at the retail level, then this article is for you.
No matter if you let someone manage your money for you, or you trade through a DIY platform — sometimes surprisingly expensive, and not necessarily cheaper than wealth managers, while you have to do all the work!
When I was putting together a nice portfolio with the investment team for my private banking clients, I often attempted to buy some of the same holdings in my personal ISA/SIPP accounts, to take advantage of the good research we have done. I got very frustrated with the exorbitant fees that basically would wipe out most or all of the return — for example, while my client pays 0.5% p.a. for a bond fund with potential annual return of 3%, I would have to pay a 5% entry fee on the Hargreaves Lansdown self-invest platform. This was because my clients pay “wholesale price” (a percentage fee) at a private bank by investing millions, when I paid retail price for the exact same thing by investing thousands.
The disparity is so huge, that a hedge fund manager once told me that for every 10% return he’d create, I’d only get 0.2% because the rest goes into fees.
That was a wake up call for me to look seriously into the fee structure of many investment products and realised that this is indeed a big pain point for many investors.
Here are the typical fee categories for a retail investor:
Custody fee (ongoing fee to safeguard your assets, usually a percentage of asset value)
Trading cost (one off cost for every buy and sell order, fixed or a percentage of each trade value)
Product fee (ongoing, each portfolio manager charges a fee, for example, a fund of fund means there are 2 layers of fund management fees)
Advice fee and/or management fee (can be one off or ongoing, this is typically by your financial advisor, separate from your fund manager
As well as all the different fees, it’s incredibly difficult to calculate the total fee ratio as a percentage of your asset value, despite MifiD2, which is a European regulation making it mandatory to disclose all relevant fee information. As a result, many investors struggle to figure out what the real, after fee return is on their investments.
DIY trading apps with zero commission have become popular in recent years; it gives people a more hands on feeling with their investment, and just takes one minute to download, and another minute to fund the account and get into action of buying and selling, with great fun, and seemingly zero cost. However, the challenge with this is knowing how to decide which company to buy, at what price and quantity, and when to sell? What percentage of your total amount is allocated to this particular company? How do you predictably, or at least confidently make a good return?
I heard answers such as “I read about company ABC in Financial Times, and they seem to do well; I would like to own a piece of that…”
I can elaborate in a future post on what “bottom up research” means and how typically it is done, but in summary it usually take years if not decades of focused research into an industry and its key players, to have insights valuable enough to give you an edge to spot the companies that beat the wider market, and buy into it early enough, and exit before the moment that its fate changes due to competition, macro environment or regulation etc. It is also an everlasting effort to stay on top of all these.
It is far more complex a decision process than just reading an article in the newspaper.
And you don’t want to lose your capital in a particular company when it goes under — this is called single company risk. It happens to companies expected or unexpected, more likely during recession years such as 2020.
Average investors should not really get into buying and selling single company shares, or at least not with the majority allocation (say 80%) of your liquid investment.
A credible portfolio manager/fund manager can look after your investment properly, by deploying the cash into a well-constructed portfolio, much like using varied and balanced ingredients to create an excellent cuisine.
For example, if you invest £100k savings into the financial market, perhaps you can allocate max £20k to a basket of single company shares, gradually, and test your “why invest” assumptions out by tracking your return on a long-term basis, if you are keen to be hands on.
A way to mitigate the single company risk, but still have a chance to “beat the market” is by thematic investing.
ETFs are a wonderful invention that allows smaller investors to have access to the markets in a direct, very liquid and cost-effective way. They make more sense than many active funds, especially those “quasi-index” active funds (the funds with for example 300–400 holdings that basically resemble an index but still charge you an active management fee, typically 2–4 times of the index product fee).
But each ETF is still an ingredient, that you still need to mix and match with the others to form a meaningful recipe. The framework of doing so is called portfolio construction.
If you want to accelerate your progressive wealth creation, so you can retire early or gain financial freedom, thematic products and conviction driven portfolios can help you do that.
Thematic products are financial products that focus on a particular investment theme, underlying some big shifts in our societal (e.g. aging population), technical (e.g. robotics) or economic (e.g. green tech) developments. Investing into those needs to be long term and helps avoid betting on the fate of a single company.
Consisting of a group of companies in the same sector or related sectors, representing a changing force in our economy, they usually have a growing weight in the financial markets.
For example, technology companies went from 20% of the US market in 2010 to almost 40% in 2020, doubling its share of the market value. You could have bought an ETF that reflected Nasdaq index, and have made 500% return over past 10 years, without having to choose which company you should buy into back then — if you have gone down the stock picking route, you might have bought Apple (1100% return over past 10 years), or IBM (0% return over the same period) — it was not a no brainer choice 10 years ago!
Conviction driven portfolios mean the portfolio managers have certain investment beliefs that they express by selecting holdings and structuring them in a way to achieve higher than market average return. A typical conviction driven portfolio has a smaller number of holdings — for example, 30–40 companies.
Portfolio managers, such as us at Rosecut use thematic investing and research convictions in order to generate above market returns for clients. Past Performance is not a reliable indicator of future returns. When investing, the value of your investment may rise or fall and there are no guarantees you will get back all the capital you have invested.