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Simplifying your life – expensively

In the New Year edition of the Hargreaves Lansdown newsletter, founder Peter Hargreaves leads off with this comment: “I am in a quandary. I can’t work out whether life just becomes more complicated the older you get, or whether successive legislation and regulation that has happened in abundance during the last 15 years is increasingly making life intolerable. I rather suspect both are root causes of life’s complications”.

I have had similar concerns of late. Having gone through some major technological upgrades in the last year (new car, new TV, new PC) it’s truly astonishing the amount of time one now has to spend to learn how to configure these products. No longer can you jump in a car and drive off, and that’s apart from the complexities of the buying process. No longer can you plug in a TV, tune it in and enjoy it. It now needs an expert to set up a Smart TV, and most of the options you will never use. At least Microsoft have improved the Windows operating system over the years so it is almost “plug and play”, but most of the application software it supports just gets more and more bloated.

The investment scene has also become more complicated over the years, not just for those in the financial services industry. The nominee system and on-line platforms distance retail investors from their investments and the companies they own, and the complexities of voting and attending AGMs defeat all but the expert.

Mr Hargreaves solution to simplifying his life is to have as few investments as possible and to use “multi-manager” funds where he can buy and forget because they will always perform well. I might be distorting his words slightly there but that is the gist of them. Needless to say that Hargreaves Lansdown promotes such funds. But this is what Moneywise have to say on their web site about such funds (there is a page dedicated to the subject): “Should you pay Michelin-starred prices for greasy-spoon style returns? Of course not – but that’s what thousands of investors routinely do by choosing from a menu of mediocre funds of funds”. They point out that the average TER (Total Expense Ratio) on a multi-manager fund is 2.14%, according to fund research group Morningstar, compared with 1.5 to 1.8% for single manager funds.

Now I would hope readers of this blog already know that any collective investment scheme that charges you over 2% is likely to be severely damaging to your long term wealth. In fact most of the returns created by the businesses which are creating wealth in the economy are being diverted into the hands of financial intermediaries at that rate (and the TER actually underestimates the overall costs being incurred and charged to you). Read the books by John Bogle if you want the evidence on this subject.

So if you want to simplify your life and still achieve reasonable investment returns some other approach is required. Perhaps a low cost index tracker or some investment trusts are solutions if you really want to spend no time on your investments. Alternatively just try to keep your core portfolio to no more than 20 individual stocks and stick to quality companies so you don’t have to bounce in and out of them all the time. By “quality” I mean the kind of companies that generate consistently high returns on capital and have a growing business.

Some software tools to help you research companies and manage your portfolio I would also recommend to cut down the time you need to spend on your investments.

But with so much information available in the investment field, the key time saver is to decide what information is important and what is not! That surely only comes from experience.

Roger Lawson

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