gryffron wrote:Lootman wrote:How can a majority out-perform? That is like saying most drivers are better than average.
We’re talking about total return AFTER CHARGES. Since the charges on managed funds are higher than trackers, and often much higher, (and charges on the index are zero), it is entirely plausible that the majority can UNDER perform.
As private investors one thing we can 'control' is the degree of costs/charges. Buy a US stock tracker and the fund will levy a fee/costs and benchmark to the net total return index, that deducts 30% from dividends. Good funds outperform that by 0.15% as that's the reduced UK/US tax treaty rate (and same for Ireland, where many ETF's are domiciled). Deduct perhaps 0.1% in fund fees and investors lag the mathematical based Index by those costs, along with any brokerage costs such as regular fees/currency conversion fees ...etc.
Consider a £100,000 investment with a broker that levies a £10/month fee and a free trade (£120/year). Conversion to US$ might cost 1% FX (£1000). A US stock tracker fund might cost 0.1% (£100), 2% dividend (around £2000 value) has 15% deduced in US withholding tax (£300) and a 1% FX conversion cost (£20). In total £1520. If sold after a year then again another £1000 approximately in FX conversion fees. Up at around 2.5% for a round trip year investment into a US stock index tracker. And that's assuming no UK taxation on dividends/capital gains.
Broadly its noted that the average investor lags the market average by around 2%/year. I guess many investors churn their portfolios relatively frequently, or perhaps buy into the likes of Investment Trust that might levy 1% type fees or maybe more.
Consider another case, a investor whose asset allocation comprises a third each in US stock, gold, short term Gilts. They open a Freetrade account opting for the Plus option that for near £10/month also includes a free ISA account and reduces the SIPP account price from £10 down to £7 (I've rounded the x.99/month type figures here i.e. £10 instead of £9.99), so for £17/month (£204/year) they have General/ISA/SIPP accounts.
They opt for SGLN, VUSA, IGLS fund holdings, combined 0.1% expense (£100). Assuming no other income they can only invest £2880 into a SIPP to which £720 is added by HMRC. Denominated in £'s there's no FX fees except on the VUSA dividends, which with £33,333 invested and 2% dividend yield = £666 dividend, £3 FX cost at Freetrades 0.45% FX charge rate. When the US stock is held within SIPP being a pension fund the US applies no US dividend withholding tax.
£204/year brokerage costs, £100 fund fees, £3 FX costs, along with a £720 SIPP credit = positive £413 (which relative to £100K = +0.4% relative OUTPERFORMANCE).
A swing of around 3% compared to other investors. In some cases that might be the entire total real return.
Some investors might look just at 0.1% or perhaps even lower 'fund fees', and that the fund appears to outpace its benchmark, maybe not realising that they might be giving up a large chunk of the overall real rewards. The financial sector is the worlds largest/richest sector and is proficient at hiding such costs from investors, as a means to pay for their high wages and expensive buildings.
The government don't help much either, MP's only call upon citizens to get voted, once voted in they serve others - with money. Instead of promoting simplicity and transparency they permit opacity that serves those with money rather than the citizens they supposedly represent. A transition from previous generations where the state would provide means for simplicity and reasonable real rewards to its citizens. Such benefits can still be achieved, but its a case of being aware and managing/navigating a rather complicated system. Many individuals could OUTPERFORM, but it takes effort and awareness that many simply do not apply/understand.
Based on the above a all US stock investor might look back at history and see that stock-heavy yielded the higher reward, perhaps that seemingly supported a 4% SWR, If in practice they lag by 2.5% before taxes, then after taxes they might have been better off in a cash deposit account. I used the above US stock, gold, bonds as the second example as that diversifies equally across £, $ and global currencies (gold is a form of global currency as well as being a commodity), with stock, bond, commodity asset diversity. Whist historically that supported a lower SWR it wasn't much lower and where if in practice its more cost efficiently applied could in practice better all-stock investors rewards, after costs. Yes contrived examples and all very subjective.