Every six months financial adviser Bestinvest publishes its list of “dog” funds that have slumped down the performance tables. The latest report contains howlers from some of the biggest investment groups: Invesco Perpetual gets a good kicking for five funds worth £15bn with woeful returns, while Aberdeen Standard has more than its fair share of hounds. Other big investment firms in the doghouse include Fidelity, JP Morgan and Janus Henderson.
Bestinvest issues the research to encourage people to monitor their investments more closely and not to put up with weak or pedestrian performance. But everything we know tells us that the majority don’t do this; a slug of our monthly pay goes into a pension that few of us ever take the time to monitor, while the few who put money into an investment Isa buy one or two funds, cross their fingers, and hope, over the long term, it works out.
Many think investment is difficult to understand (it’s not), and it’s boring (yes, it can be). But it needn’t be this way. It’s not that difficult to get the big things right, and protect yourself when things going wrong:
• Stay balanced Remember Enron, the fraudulent US energy giant? Not only did its workers lose their jobs when it went bust, they lost their pensions, too, because their money was largely invested in Enron shares. A Turkish worker whose money is entirely invested in Turkish stocks, may be feeling that way this week, too. “Balance” is boring, but crucial. Keeping at least two-thirds of your long-term savings in equities (shares) and the rest in bonds, is a decent starting point. Spreading those over markets across the world, rather than just domestic UK shares, is your next step.
• Take risk Even if you are 50, you are likely to have another 35-40 years to go, and sticking it in “safe” bonds or (worse) cash/sterling is likely to cost you. Many “default” funds used by company schemes are too conservative, with too heavy a weighting towards bonds, arguably currently overvalued as they tend not to do well when interest rates rise. Log on to your company pension scheme and check your “allocations” – and change them if they’re too conservative for you.
• Don’t try to be too clever I feel the US equity market is “toppy”, and UK shares relatively cheap. The US is 60% of the global index, which means every pension has huge amounts of exposure to Wall Street: the top five stocks held by British workers “auto-enrolled” into private schemes such as NEST are: 1, Apple; 2, Microsoft; 3, Amazon; 4, Alphabet (Google); 5, Facebook. There’s not a single UK stock in the top 10. Are you happy with this massive exposure? I’m not, so have pegged back my “exposure” in my company pension scheme. I may be wrong. So trim, don’t axe. Not having anything in US tech is as nutty as having all your money in it.
• Charges matter Your company pension scheme probably doesn’t have obnoxious charge levels. But your investment Isa or Sipp probably does. I’ve decided to switch to indexation and cut out the middleman. So far, it’s paid off. There are plenty of low-cost tracker funds – never soaraway winners, but never in the doghouse, either. It’s a trade-off I’m willing to accept.
The entirely manufactured outrage over inheritance tax
We must all know by now that inheritance tax is out of control. After all, just read the headlines: “Inheritance tax spirals” (Daily Mail); “Inheritance tax shock: Government rakes in £5bn record high from Britain’s dead” (Daily Express) and “Britain’s maddening death tax regime” (Telegraph). Millions of us are suffering as the evil tax man grabs what little we have left that we want to leave to our kids.
But the furore around IHT is wildly overcooked. How many estates paid inheritance tax last year? A grand total of 24,500. Nineteen out of 20 people who died last year paid not a penny in IHT. And they amount they paid has barely moved up in recent years. According to an analysis by financial advisers Hoxton Capital Management, the average amount paid has gone up 8% over the past five years – although property, which makes up the bulk of any estate, has gone up in price by around three times that. Yes, more estates are paying, but it’s still a tiny number of the 550,000 or so people who die every year, and adjusted for property price inflation, the amounts paid are actually falling.
Inheritance tax is not a tax on the working class. It’s not a tax on the middle class. It’s a tax on the upper middle class and the very rich. That’s why you hear so much about it in some newspapers. It’s one of the very few ways that the state can take a share of the unearned property wealth created in recent years, rather than having to tax working people’s incomes. And that’s why the wealthy lobby so hard against it. The “maddening” thing about IHT is how few estates pay, and how successful that lobby has been.
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