I have long argued that charges are not always the be all and end all when it comes to investing.
The problem is that we are fixated on charges and a belief that the higher the charges the more you will lose in your investments. To lower charges further there is an argument that funds which track an index will deliver better returns than an active fund because of the lower charges and the inability for many managers to beat the index.
For nearly five years we have been running portfolios, and recently I put together a closely matching portfolio tracking the index. The index takes into account a charge of around 0.4% and ours including the platform charge, fund charges and our fee comes in at around 1.7%. That is a whopping 1.3% p.a. difference.
Each year we review the funds and rebalance.
Our Cautious Portfolio has returned 84% since 1 January 2009; the equivalent index portfolio would have returned 43%.
On the more adventurous side the portfolio has delivered nearly 95% return and the index 57%.
This means on the cautious side we have delivered 95% out performance and 67% on the adventurous side with a 1.3% p.a. drag.
This blog is not about how good we are, the point of the blog is this. We are conditioned to think that high charges kill performance however good active managers will charge more as will financial planners however if they can deliver significant returns over the equivalent tracker portfolio then actually these high charges are insignificant.
Of course there are two additional points to consider, often when investors choose trackers they do not develop a portfolio of tracker funds and therefore heighten the risk and potentially lower the return and secondly investors can develop their own active portfolio. The cost of an equivalent active portfolio without advice would be around 1.35% p.a. The question then is, is it worth paying 0.35% p.a. to get someone to do the research and build the portfolios for you as well as giving you piece of mind with regards to your financial plans.
In conclusion what is painted is not always true you need to dig deeper, think deeper and sometimes go against the crowd to achieve what you want.