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

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Presentation on theme: "Why the returns from your investing may be less than you think Pete Comley."— Presentation transcript:

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.

3

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

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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:

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 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)

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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 –

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% £ %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%

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36 Example: Endowment Policy 25 year policy from 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

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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


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