In the previous post, we looked at costs, how to understand them and everything you need to know about them. This time, we'll look at what you need to do.
Everything You Need to DO
1. Consider Passive Funds
There are merits to passive investing, because passive tracker funds tend to be lower cost than active funds because they track markets rather than trying to beat them. I think passive investing suits the majority of people, who have more interesting things to do with their time.
If you buy into the mantra that it’s time in the market that matters, more than how you invest, then opting for lower cost trackers is a no-brainer. Watch my video exploring the differences between passive and active investing here.
2. If Self-Investing, Consider Platform Costs Carefully
If you’re going to use a platform to do the investing yourself, then consider HOW you are likely to invest. Are you going to invest regularly, as in monthly, or once a year? Are you going to top up with ad hoc lump sums? Are you going to deal regularly, or buy-and-hold?
Which wrappers are you going to use – ISAs, pensions, GIA, investment bonds and so on? All these have a bearing on which platform you might choose. If you’re going to deal regularly, then you want one with zero or low dealing fees.
If you’re going to buy-and-hold, then dealing fees don’t really matter. If you have a large fund, then percentage fees might be less attractive than fixed annual fees.
Think about how you are going to invest and then choose a platform whose costs best work for you. The free guide to self-select platforms from my friends at the Lang Cat is well worth a read when choosing an online platform.
3. If Using an Adviser, do the Same Exercise
An adviser can be worth their weight in gold. I would say that, but my clients rely on me to know what’s out there to help them in their specific situation, and by paying me they often end up saving considerably more money elsewhere.
If you’re considering using an adviser, think in advance about how you would like to work with them. Do you want to delegate completely, or just use them as a second opinion, or a check and balance to your own plans? Do you want to see them every year, or just check in once every three years for an update? Will they be investing for you, or just planning?
Every time you meet with them, it should be clear how they have justified their fees. Any adviser that justifies their fees on investment performance alone is likely to be a charlatan. No adviser can influence the markets, and if they made good investment decisions for you, that’s probably more luck than judgement.
4. Use Pensions and ISAs
Most people only need to use these two wrappers, which are extremely tax-efficient. Pensions especially, with the addition of tax relief at outset can offset much of the impact of charges by giving you free money from the government, your employer or both!
Most people don’t need a full-featured SIPP, which can enable property purchase and other more esoteric investments. Most of us just need a simple platform pensions with some funds in. Don’t pay for functionality you don’t need.
5. Harvest Gains and Losses
If, perchance, you do have money held outside the usual tax wrappers, specifically in a general investment account (GIA), then consider harvesting gains and losses as you go along.
Each year you get a capital gains tax allowance, and it’s currently £11,700, but if you don’t use it, it’s gone. If you have gains, realise them by switching investments to lock in those gains within the allowance each year.
The alternative is possibly to make a massive gain at some point in the future, when you’ll still only have that one year’s allowance. You can carry forward losses too, to offset against current or future gains. If you use an adviser and they’re not doing this for you, ask them why not…
Costs are inevitable, but as ever, the watchword here is to be intentional. Don’t pay fees because you can’t be bothered looking too closely at what you’re paying. An annual breakdown will show you what you’re paying where and if they’re worth it. Take costs seriously – they can erode your future wealth, but it doesn’t have to be inevitable.