Progress against my goals in Q3

My goals for each quarter are as follows:

  1. For my net loan to shrink by £10k per quarter, without any margin calls.
  2. Maintain investment income of at least £Xk
  3. Closely track my target asset allocation

Goal 1: For my net loan to shrink by £10k/qtr

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My portfolio performance – September 2016. ‘Hard’ vs ‘soft’ Brexit emerges

September.  The academic new year.  The Jewish new year.  The end of the press silly season.  What did it hold for us?  More banging on about Brexit  – with the three Brexiteers all appearing to get slapped down by their boss at various points for saying we would / wouldn’t leave the single market / leave the customs union / trigger the legals by such-and-such.  Amidst the heat and the light, what actually happened?  Not a great deal.

The pound fell, of course, a bit further (though nothing compared to what, at the time of writing, the Tory party’s annual conference is doing to it).  This meant that UK equities were up. US equities were flat, remaining at record highs on some measures.  Bonds fell everywhere I track – by as much as 1.9% in the UK.  Does this mark the top of the bond cycle?  Time will tell, and time will also make a mockery of anybody who tries to make such calls.


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Warning: private banking injures your wealth

Picture the scene.  You’re an entrepreneur / widow / recent inheritor / recent divorcee or similar.  You don’t work in financial services.  You find yourself receiving a lump sum of cash – more than you have any immediate plans for – and, as surely as a carcass on the African plains attracts vultures, you end up talking to a private banker or an independent financial adviser.

If this scene is familiar to you, then I think this blog post is the most important blog post you will find on my blog.

The charming, well-dressed and thoroughly presentable financial professional makes arguments along the following lines:

  • I am a very experienced financial professional.  You can tell from the quality of the tea and biscuits, my dress code, and perhaps my accent – suggesting that at least my parents and grandparents had a lot of money.
  • You are a talented and clever person.  Either because you created value some of which you have just ‘cashed out’, or because you married a very talented/rich person who sadly(/happily?) is no longer with us and/or you.
  • You realise that leaving your money in cash gets it nowhere, before tax.
  • You understand that all the rich people do not just leave their wealth in cash but instead have their money ‘invested’.  I invite you to believe that this has helped them to protect, maintain and increase their wealth.
  • There are a lot of clever things you can do about tax.  [For the purposes of this blog post I am not going to expand on this further].
  • You do not have the time and/or expertise to manage your money yourself. Picking stocks is gambling, complicated and your money can be at risk.
  • I and my firm manage money for a living (therein lies a clue which I don’t want you to dwell on, and heaven forbid don’t ask what I do with my own money).
  • In fact at my firm we can do various particular things for you:
    • We have many clever analysts. I can introduce you to some and ensure you have ready access to them whenever you want it.
    • We have economies of scale which allows us to negotiate better rates than you or our lesser rivals can get.
    • We can invest in overseas investments.
    • We have access to special investments  that aren’t generally available. These include investment products made by some of the most famous and successful financial services firms of all time, who do not deal with mere mortals such as you.
    • We, or some of our most trusted friends, can structure special products which turn base metals into gold eliminate all risk and practically guarantee fantastic returns.
    • We can look after whatever tax filings you need in whatever jurisdictions / etc your tax planning / divorce court / similar lands you in.
    • We will review your finances carefully against your objectives and give you professional, bespoke advice – a complete financial strategy, along with all the help you need to execute it.
  • Fees? Well, since you ask, yes there are some fees but they are very modest. Essentially only just 1% of all that money we manage for you, along perhaps with occasional incidental expenses.

I invite comments about how well I have captured the thrust of a typical IFA/wealth manager’s pitch.  I have quite a bit of experience of being on the receiving end here and think I have captured the key pitch; indeed, I would even say that it does sound quite compelling.

I myself took the bait about 15 years ago. I have had a pot of money managed by a private bank since around 2000.  I did so as part of a ‘test and learn’ strategy in which I put various pots of money to work in various places – some went to private banks, some I managed myself, some went into structures I found with an IFA. I tracked all of it quite carefully with some professional investment-tracking software (alas that is no longer on the market).  Since 2013 I have been more rigorous and have done full month-end tracking which I post on this blog, but I have most of my portfolio tracked pretty accurately (albeit updated sporadically, not monthly) since around 2000.

What I gradually learnt from 2000 to 2010 was that the money I managed myself did better than the money I invested with the professionals.  I didn’t really think about why this was – other than my ineffable genius – but it was pretty clear that fees were a part of it.  Gradually I moved more and more of my money into pots that I manage myself, leaving the pot managed by the private bank as a smaller and smaller proportion of my net worth.

In the last few years I have become increasingly maniacal about  fees.  Yet even as I did so I continued to pay my private bank 1% to manage a large balanced investment portfolio.  I reasoned that this was the ‘entry ticket’ into that relationship; the private bankers gave me decent service (at a transactional level) and that the 1% fee, when viewed across my entire portfolio (most of which has <0.1% fees), wasn’t an unreasonable fee to pay.  My blended expense ratio was well under 1%, or so I thought.

In any case, with the recent FT article about fund managers making 2.5% per year on typical portfolios, I wondered ‘who are the idiots who are paying 2.5% per year?’.  And this got me looking more carefully at my own situation.  And lo and behold, my ‘1%’ figure turns out to drastically underestimate the fees I’m paying. I discovered I myself am one of the idiots.

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