The dramatic late-week rally in stock markets after Black Monday’s trillion-dollar sell-off proved that investment pundits were right to caution against panic selling. Investing is a fraught business and volatility and short-term losses are part of the package. You can put your money in cash savings and receive derisory interest, or risk the markets and more than likely make decent money over decades.
The crisis that culminated on Monday in the biggest one-day falls in leading indices since 2008 was the result of fears around slowdown in China. Growth there has been easing back for years in what’s arguably part of a necessary transition to a more mature economy. However, sharp recent falls in the country’s stock market, troubling economic figures and the government’s clumsy fiscal policy including its devaluation of the yuan, have raised concerns that China could be on track for a full-on crash, with global fallout.
There are certainly fundamental problems in China’s economy and financial systems. These haven’t been resolved despite the market rally and will continue to have knock-on effects both on emerging markets that have come to rely on Chinese demand for raw materials; and to a lesser extent the West.
Previous sky-high expectations for China were unrealistic, but that doesn’t make the country a basket case. There is still plenty that’s positive about its economic trajectory and analysts believe global markets have “priced in” the risks that remain. In the worst-case scenario of a Chinese economic crash, the country would recover in time and contagion in Western markets would be limited.
A balanced share portfolio is remarkably resilient. My grandfather was born in 1890 and died in 1983, when I was a year old. He served in two world wars and lived through the Great Depression, the dismantling of the British Empire and the Cold War — times of much greater uncertainty than today. Like many of his generation, he kept a small portfolio of blue-chip shares and they performed well in the long-term, despite the upheaval of the times.
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Investors shouldn’t be afraid of market crashes or sell-offs. They are an integral part of the economic cycle and provide opportunities for bolder stock-pickers. What is much more insidious is the eroding impact of fund charges on investment returns. These look small but frequently have an appalling cumulative impact due to the effects of compounding.
When you invest money in an actively managed fund you typically pay an annual management charge, transaction charges (deductible whenever the manager buys and sells shares or bonds) and other costs such as custody and administration fees; that’s as well as a platform charge and any adviser charge. Most charges look insignificant, but they add up so that the total cost of investing can easily top 2.5 per cent a year. If that doesn’t sound that much, you need to consider the mathematics of compounding over time.
According to Sensible Investing, a non-profit website financed by Barnett Ravenscroft, high charges can reduce potential returns on a £100,000 investment by more than two thirds over 40 years. Assuming a total cost of investing of 2.74 per cent and an annualised return of 8 per cent, your investment would be worth £2,172,452 before charges, but £777,203 thereafter. In other words, charges would have taken almost £1.4 million of your returns.
Gina Miller, left, co-founder of the True & Fair Campaign, which raises awareness of the impact of charges and pushes for reform, says that the total average cost of investing in funds with large wealth managers and adviser firms is actually 3.6 per cent a year. She cites the example of two £100,000 pots invested over ten years; one charging 3.6 per cent, the other 1.2 per cent. If both grow at 5 per cent a year, the low-cost pot would deliver a profit of £44,365, while the high-cost pot would return only £12,892 — again, that’s more than two thirds less.
High and often opaque charges remain the biggest danger for investors even after regulatory changes in the Retail Distribution Review. Many investment companies are getting away with ripping off clients partly because people don’t grasp the effects of compounding, and also because they tend not to notice charges that are automatically deducted.
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If investors had to write a cheque or count out hard cash for the fund charges they’re paying each year, they might reconsider their holdings.
Unlike the trouble in China, investors can do something about charges. Jason Witcombe, at Evolve Financial Planners, believes that many ordinary investors could realistically shave 0.5 percentage points off the charges they pay by switching to lower-cost funds and platforms over time: saving £500 a year on a £100,000 portfolio and large sums in the longer term.
He tends to recommend low-cost index-tracker funds, which provide the cheapest way to invest. He says: “Some people assume that paying more in charges buys you better performance — there’s no evidence for that. In fact it’s the opposite.”
The True & Fair Calculator at trueandfaircalculator.com is a free tool you can use to estimate the total cost of investing in a particular fund over a certain period.
High premiums are an injustice
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We recently revealed how insurers charge inflated travel premiums to people who have common medical conditions that are well managed. Most insurers use the same tick-box medical screening systems, which don’t take into account individual circumstances and therefore label far too many people as “high risk”.
As a result, people with raised cholesterol that is controlled with medication pay the same higher premiums as people whose condition is not controlled. And that’s assuming the latter declare the issue. In fact, most don’t go to the doctor, so end up paying the lower premium intended for someone “healthy”.
A company that develops widely used screening systems admitted that the extra risk represented by someone taking statins over another holidaymaker who has never had high cholesterol is “negligible”.
In reality, the people who declare common, controlled conditions are among the healthiest of their age group and least likely to keel over on the beach. The industry says that revising screening processes would be too complex. But it would surely be easy enough to ask those who declare high cholesterol if they are taking medication following a doctor’s plan and to cut prices for those who say “yes” from current levels.