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stupid investments

Books + Ideas, — February 2012

I had a brief conversation the other day with an investment advisor from my bank here in the UK. As soon as he found out that I knew what an index fund was and owned shares directly, he told me bluntly he didn't think he could help me. There were no juicy commissions for him, or his employer, in any of that. (I had been passed on to the wrong person, I actually just wanted to try and find a cash account with a better interest rate.)

A few years ago I saw the detailed investment advice a friend got from a financial planner from a leading Australian bank. This suggested putting 25% in a "growth" fund, 25% in a "value" fund, 25% in some kind of index fund, and 25% in assorted small cap and international funds. All these funds were, of course, affiliated with the bank in question. They were also quite conservative funds which stuck (for the first three) to ASX 200 companies and didn't deviate from that index in any serious way, so collectively they couldn't conceivably have outperformed the index by more than a percent or so, even if all went well. But the average management fee across the funds was well over 2%! (And Investors in the UK pay twice as much in fund management fees as in the US.)

A slightly mixed index fund, something like the Vanguard Australia High Growth Fund, would give pretty much the same result, probably with slightly lower volatility, but with management costs of only 0.6%, dropping to 0.35% on amounts over $100,000. In the UK, the Fidelity Moneybuilder UK Index fund has a total expense ratio of 0.3% and the Vanguard UK Equity Index Fund (PDF) has a TER of only 0.15%.

There are an extraordinary number of share funds that do no more than tweak their weightings from an index — overweight BHP and CBA, maybe, and underweight RIO and NAB, or one of a million variants on this — and take a big chunk of the assets under management in exchange. Every major bank has a full set of such funds, just for starters. It boggles the mind that so much money — many of these funds are quite large — can be invested so badly, but that's what happens when people trust "free" advice provided by their banks.

Fortunately, starting in July this year, Australia at least is clamping down on commissions and other conflicts of interest by financial planners. If this sees all those gouging funds closed down and the finance sector shrunk a little, that would be great.

A patient enough investor, who didn't over-trade, might well get a better return, albeit it with much worse volatility, picking penny-dreadful mining stocks based on pub tips. Which is, of course, the other great investment obsession of Australians, along with riding real estate bubbles.

Usual disclaimer: this is completely generic commentary, not intended as advice to anyone.


  1. Well said. Being well read is one thing, but you do understand and digest what you read. The mumbo-jumbo of investment jargon proved not daunting to you. The so-called investment advisor could not pull the wool over your eyes. You were more than a match.

    It is difficult to sort out the wheat from the chaff when it comes to advice from financial planners, investment advisors, or fund managers. I see most of them as sharks circling their prey.

    No, I haven't been had. It is just that I have heard so many negative tales. I am espeially sceptical of those free seminars hosted by investment advisors selling real estate. They know there are not going to be well-prepared attendees asking sensible questions. Most of the audience is a gullible lot, easily duped into signing on the dotted line or part with their money for a useless investment kit.

    My cousin's husband is a very astute businessman in Hong Kong. The couple is doing exceptionally well. There is a big wealth gap between me and them. Cousin's husband always wanted to see me doing a little better.

    About two years ago, he told me it was time to invest in Hong Kong taxis for which he had considerable panache. For what small amount of spare cash I had, he had secured a plate and vehicle for me. Now, my investment has gone up at least five fold in value. It is now levelling off a bit but still snowballing along nicely. It is not value gained on paper, my little investment is liquid asset, easily redeemable in cash.

    I might sound a little greedy, If I hadn't put aside a small sum for my travels, I could have invested more and planned for my retirement a lot sooner.

    Comment by DL — February 2012
  2. Come on!

    These people also need to make a living. ;D

    Comment by Magpie — March 2012
  3. Magpie, one saving grace of this kind of financial extraction is that the actual resource costs are low. There may not even be much labour involved. Looking at their descriptions, some of these funds could probably be entirely automated - run a value screen over the ASX/200, overweight or underweight a few holdings, and have everything else (trade execution, sales, client interfaces, etc.) handled by existing systems of the company. Voila! Instant "large company value fund".

    Comment by danny — March 2012
  4. Think of the shareholders, and the end-of-year bonuses... Like Romney said, corporations are people, too. ;D

    Comment by Magpie — March 2012
  5. Doug: It's always easy to judge investments after the event, so you may have been wise only to invest as much as you did. (I'm reluctant to either take or give investment advice to friends or family, lest bad outcomes damage my relationships.)

    Comment by danny — March 2012
  6. My cousin's husband knows the industry well, and he is a significant player. For the same amount of money I invested, I could not gain a toehold now. The entry threshold is raised way beyond my means. He foresaw the flood of money flowing from China into Hong Kong for top end real estate and gilt-edged investments. And he set me up for a nice little earner. My fivefold gain in value is a conservative estimate.

    When I went to China and Hong Kong last Nov / Dec., I redrew from my investment for some spending money. He facilitated everything. I didn't have to lift a finger or sign anything. Cousin's husband is just like a mother hen, having me under his wing. He is very protective and simply wanted me to do a little better, instead of slaving long hours, weekends, or jumping up and down in glee after scoring a little overtime to top up my pay. He is magnanimous in that he is quite happy to see others improving their lot on the back of his expertise. For this small player, I am grateful.

    Comment by DL — March 2012
  7. Don't be a banker's "muppet"

    Comment by danny — March 2012
  8. I have no fear. What I invested is just pittance when compared to what cousin's husband is used to dealing with. I can withstand the blow if things gone belly up. And there is no chance of that happening. Even on blue chip stocks like HSBC, he managed to score winners from time to time. He did not want me to ride the stock market roller coaster.

    Many of his employees and close relatives are benefiting from his largess as it were, and have a nice little nest egg built up. If I had the money to invest nine years ago during the SARS epidemic in Hong Kong, I could very well retire and travel the world now. He took a hammering initially when SARS struck, but he also saw a golden opportunity when things hit rock bottom. He hit hard and bounced back a big winner.

    Comment by DL — March 2012
  9. So how do you own shares directly in the UK? I'm scratching my head on that, since all google searches point to brokers being necessary intermediaries.

    Comment by Carlos — May 2013
  10. You do need a broker to by or sell shares, but there are online brokers who basically just provide you an execution service for a small fee. The major banks - Lloyds, Barclays, etc. - all seem to run share dealing services and there are independent ones as well, e.g. http://www.iii.co.uk/shares

    Comment by danny — May 2013
  11. Thanks, I'll look at iii

    Comment by Carlos — May 2013

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