1. Why the returns from your investing may be less than you think Pete Comley

2. Disclaimer This talk is for educational purposes only and does not constitute professional advice.

4. Q. How much do you hope to make on your investments in 2013?  0-5%  6-10%  11-20%  20%+

5. “[Our aim is] to help you return 12–15% per year over the long term.”

6. “Historically, [stocks] yield an investment return of about 10%.”

7. Source: Barclays Equity Gilt Study, 2012

10. Is the return calculation really that simple? These are theoretical returns. What about….

11. Stocks/funds you pick Your strategies Timing of your trades Skill Published indices Dividends Survivorship bias Returns Annual fund charges Commissions to intermediaries Bid/offer spread Trading commissions ‘Price impact’ Broker account fees IFA fees Stamp Duty Tax on dividends Capital gains tax Costs

12. How do best measure skill?

13. Just 6 of the 72 schools beat the FTSE

14. Source: http://stockchallenge.co.uk/

15. Monkeywithapin = the random stock picking entry in the UK Stock Challenge competition 2011 – Monkey in top 10% 2012 – Monkey in top 10%

16. Ola the Chimp Competition over a month with 5 pro traders. Ola’s gains X4 best other pro!

17. Wall Street Journal Competition 147 monthly competitions between 1990-2002 The competition: – Top 4 Wall Street pros each picked a stock vs – Editorial staff threw darts into the paper Results assessed after 6 months

18. Source: E.Porter, Journal of Applied Finance (2004)

20. Source: Barber, Lee, Li and Odean, University California Berkeley, Working Paper (2005)

21. Why skill is low: xPoor stock picking xBad timing

22. Investors in funds worse DALBAR analyses ALL US mutual funds Returns after inflation over last 20 years: -5%pa -5% a combination of: – Poor fund selection/timing – Fees

23. Source: IMA

24. Factors reducing investors returns Investors in shares directly Investors in funds directly Skill/alpha of the investor–1.3%–2.2% Skill/alpha of a fund managern/a+0.2%

25. What is the FTSE?

26. Source: Comley (2012)

27. Disappearing funds In the UK, the fund industry closes 10% of failing funds each year Beware: Fund stats only show successful ones! Estimated effect = -1% pa Source: Rohleder, Scholz, Wilkens, Review of Finance (2011)

28. Effects of survivorship bias on indices I can’t find any definitive work on it (idea for a dissertation??) However not using complete datasets has a massive impact on financial models Source: Frank Hassler – http://engineering-returns.com

29. Factors reducing investors returns Investors in shares directly Investors in funds directly Skill/alpha of the investor–1.3%–2.2% Skill/alpha of a fund managern/a+0.2% Index error due to survivorship bias–1.0%

30. Q. What is the average size of your trades?  £250 (or less)  £500  £1000  £++more

31. Costs of trading shares CommissionsStamp dutySpreadTOTAL £25010%0.5%0.7%11.2% £5005%0.5%0.7%6.2% £10002.5%0.5%0.7%3.7% + account fees + tax

32. Fund Charges Annual fees (TER): 1.7% – Can be less on passive funds – Can be a lot more! Bid/offer spread: 5% – Can often be much less* Distribution levy: small * For my calculations, I have assumed an average 2.5% spread amortised over 5 years i.e. 0.5% pa.

33. The Hidden Costs TER (Total Expense Ratio) excludes: – Trading commissions – Stamp duty – Bid/offer spreads – Price impact Hidden costs are very dependent on Portfolio Turnover Rate (PTR). Assuming 60% PTR, hidden costs = 0.6%

34. Factors reducing investors returns Investors in shares directly Investors in funds directly Skill/alpha of the investor–1.3%–2.2% Skill/alpha of a fund managern/a+0.2% Index error due to survivorship bias–1.0% Trading commissions–2.5%–0.1% Stamp duty–0.5%–0.3% Bid/offer spreads–0.7%–0.1% Price impactn/a–0.1% Initial charge/distribution levyn/a–0.5% TERn/a–1.7% TOTAL–6.0%–5.8% -0.6%

36. Example: Endowment Policy 25 year policy from 1988-2013 Projected returns: >£48k Paid in: £17,250 Value now: £27,500 (4.2% growth) – But inflation averaged 3.5% – Stock market return of 9.2% Where is the missing 5%???

37. Cash would have better than share investing over the last 20 years

38. What might be future equity returns? Deutsche Bank predicting 0.6% above inflation (in the US) for the next decade Barclays Mortgage Dept now assume returns from Stock ISA investments over next 25 years will be: – Just the cash you pay in (not even inflation added)

39. What might be future cash returns? “Financial repression” will ensure: interest rates remain low (for as long as possible)

40. However don’t expect cash to out- perform in the future

41. Three tips to cut your costs 1.Trade less 2.Trade less 3.Trade less

42. Some other tips to cut your costs Pay no more than £10-£12 commissions Trade as large a size as possible Check bid/offer spread before buying Read small print charges and avoid any that charge annual fees, inactivity fees, etc Pick funds that have low annual charges and low initial charges/provide rebates Use funds for international exposure

43. What’s the best strategy? “Buy and hold will be poor option [over the next decade]”

44. Turtle Traders Richard Dennis bet William Eckhardt that anyone could be trained in 2 weeks to be a successful trader 2 of the 14 went on to earn $175m The secret: follow a system

45. Recognise that you need rules Determine some good rules Follow those rules The secret to successful investing

46. My Strategy

47. FTSE My view on the FTSE

49. My stock selection strategy Low cost trackers Stocks selected by a monkey

50. Finally, the missing 6% equates to: £170bn a year UK Health and Education budget £3000 for every UK citizen

51. Thank you You can download the book for FREE in all eBook formats from monkeywithapin.com