The Motley Fool actively encourages people to take control of their own finances. Here's why…
Choosing to take personal responsibility for your financial future is the single best financial decision you can make.
Too many times we receive emails like this one…
"I have $240,000 in shares with a managed fund, and pay monthly fees of $110. Against those shares I have a $220,000 margin loan with repayments of $1,200 per month.
Over the last 4 years these shares have lost approximately $85,000 and I have been paying that loan all the time."
Wow. What a mess. We feel your pain.
The market has certainly felt some pain in the last 3 years, but that's a shocking situation to find yourself in.
Unfortunately, the situation is way too common. And even more unfortunately, with all those fees and interest, there is almost zero chance of our friend ever earning a decent return, over time.
The odds are totally stacked against him…
As quoted in The Australian Financial Review, of the 89 funds offering a long-only Australian strategy using the S&P/ASX 200 Accumulation Index as their benchmark, only the top two have outperformed the market during the past 12 months.
2 out of 89…
And that's before costs — the $110 per month in fees our friend is paying, plus more than a few other costs that will be hidden away in the small print.
In the words of the title to the famous book, fund managers are doing very nicely, but "Where Are All The Customers' Yachts?"
Indeed.
The best thing about the email was that our correspondent knew he needed to take action:
"Do I bite the bullet & sell all the shares so I don't have a loan… and then buy shares regularly & increase my portfolio? Or say maybe sell $100,000 worth of the shares?"
The Australian Financial Services Licencing regime (quite rightly) doesn't allow anyone to give personal advice without a consultation, and understanding the needs and objectives of the questioner.
We can pretty comfortably say – in general, of course – that owing $220,000 on a $240,000 portfolio is a risky strategy. If the portfolio fell a mere 8.5% in value from here, our friend would owe more than he owned!
The best course of action, painful as it may be, is probably to get out of the managed fund, discharge the margin loan, and take the net $20,000 that's left over and, in our friend's own words, "buy shares regularly & increase my portfolio."
The arguments against will likely be tax-based, the margin loan being negatively geared. Fat lot of good negative gearing does when the value of your portfolio slumps by $85,000.
Investing need not be rocket science…
- Start early.
- Keep the fees low.
- Invest regularly.
- Avoid debt.
- When it comes to tax, don't let the tail wag the dog.
Our friend still has time on his side. He can invest his $20,000 in a low-cost index tracking fund, like the Vanguard Index Australian Shares Fund (no affiliation with The Motley Fool), and make additional BPAY investments from as low as $100.
We may be missing something, but we figure it's far better for our friend to invest all those monthly fees, all those margin loan repayments, into the shares rather than into the pocket of a fund manager or financial advisor.
Or he can buy shares in a company like Argo Investments (ASX: ARG). Adelaide-based Argo is an investment manager with a long track record of market-beating returns. Buying shares in this one company delivers instant diversification and a shot at outperforming the market.
Or if he really wants to try his hand at out-performing the market, he can pick stocks himself — not the highly speculative types that many investors are drawn to — but good, solid, growing companies that offer wonderful long-term returns.
Einstein may or may not have declared compound interest to be "the most powerful force in the universe", but it's not far from the truth.
Solid returns, compounded over a long period, can generate staggering wealth. But the opposite is also true. Poor returns coupled with high costs can be totally wealth destroying, as so vividly shown by our friend's sad story.
What's it to be? The choice is yours…
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