The cost of investing

At Evolve, we can advise on portfolios for less than 1% p.a. and for large portfolios the cost can be significantly lower. However, this is only meaningful when it is put in context. It is not unusual for the charges on a stockbroker’s managed portfolio to be well in excess of 3% per annum.

The table below shows the damage that this causes to the value of one’s portfolio.

Total return after deduction of charges on a £250,000 investment

This table shows the return of a £250,000 portfolio after five, ten, fifteen and twenty years with a 7% growth rate when different amounts are deducted for charges (taxes are ignored).  The results are alarming.  Even after five years, when a portfolio has expenses of 4% per annum, it worth almost £50,000 less than a portfolio with costs of only 1% per annum.  Over twenty years, the figure rises to a staggering £363,658.

Whilst over the long-term a growth rate of 7% for a balanced portfolio is probably reasonable, if the equity and bond markets produced poorer returns of say 5% annually, the figures are even more depressing.  The value of £250,000 in a portfolio with 4% charges in twenty years time would only have risen to £360,712.  This compares to a portfolio with 1% charges of £542,538.

Reviewing the portfolio and rebalancing

Finally, it is essential to review any investment portfolio and your circumstances on a regular basis. There is no point in carefully structuring a portfolio and then neglecting it. For example it may be appropriate to alter the structure and risk of your investments if your personal circumstances or time horizon changes. We will assist you in making these decisions as part of your annual review process.

As far as the portfolio is concerned, its maintenance is simple and cost effective, by using a tool called rebalancing.  This involves reviewing the portfolio after a given period of say a year and monitoring which asset classes have outperformed and which have underperformed.  In a simple example, if a portfolio only had two assets, one of which rose by 12% in the year and the other which fell by 5% in the year, we would reduce the capital held in the asset which rose and reallocate this to the asset which fell so they were back to their original proportions.

Whilst this may seem a strange way to position a portfolio, it forces the investor to realise profits when an asset has risen, and buy more of an asset when it has fallen – in other words, buy low and sell high.  This may be extremely difficult to do in reality as it is going in the opposite direction of the herd.  This is the point when discipline is important and the surrounding noise has to be blocked out.  It will mean avoiding technology bubbles, latest fads in the weekend press and tips from friends on the golf course.  It is particularly difficult to do in a bear market when equity markets have fallen three years in a row.  But those investors who continued to increase their equity weightings in 2002 and 2003 will have far outperformed those who did not adopt a rebalancing approach. Evolve will help you maintain the discipline when it is most needed.