Money Clinic: How to skip the middleman as a smart investor
Rather than use a financial adviser, I’d like to invest directly into funds. What’s the best way to go about this and what pitfalls should I watch out for? GH, Dubai
The expert: Steve Cronin, founder of the financial education and support forum Wise, wiseuae.com
Financial advisers provide knowledge. Savings plans provide discipline. If you go it alone, you’re going to have to find some of both. It’s worth it to avoid the hidden fees and exit penalties in the plans sold by most UAE banks and advisers. It has never been easier to invest cheaply and effectively.
• Mindset: First, work on your mindset. Be prepared to spend at least a couple of hours learning investment basics. Become extremely conscious of cost and suspicious of complexity. Commit to investing monthly or quarterly, even when the market is tumbling. You should be delighted when the market falls, as the stocks you will be holding for 10 or more years are going on sale.
• Education: The best book to get you started is The Global Expatriate’s Guide to Investing, by Andrew Hallam. Websites like Monevator and This is Money have good advice, though less focus on expats.
•Needs: How much do you want to spend annually when you retire? Divide the sum by 3 or 4 per cent to find the portfolio size you will need on retirement. The Moneychimp.com investment return calculator can then determine how much you should be saving annually to get there. Are you saving for anything specific in the next one to 10 years? You can create a lower-risk sub-portfolio for it.
• Asset allocation: This is the single biggest driver of investment outcome, so it’s worth getting it right. Make sure you always have at least three months of expenses in a cash account. Your main portfolio should be for retirement and contain a mix of bond and equity funds. Equity funds provide a higher return but are also more risky. Assess your risk appetite – how much money are you prepared to lose in a bad investing year in return for higher gains in other years? Risk is also linked to your time horizon. If you have 20-plus years to retirement, you can (and should) ride out the ups and downs of the equity markets. A sensible guide is to have your age in bonds, ie a 40 year-old should have 40 per cent bonds, 60 per cent equities.
Sub-portfolios for specific needs, eg a house deposit in three years, require a more conservative allocation such as 70 per cent bonds. Manage sub-portfolio allocations on a spreadsheet – you only need one actual investment account. Most of your portfolio should be in developed markets such as the US, UK and Europe.
• Platform: Platforms like TD Direct Investing (Luxembourg), Saxo Trader Go (Dubai) and Interactive Brokers (US) allow expats to invest in funds and ETFs (exchange traded funds). Note any platform fees and transaction fees, especially whether they are percentage-based or a flat rate. The platforms will encourage frequent trading, exotic funds, leverage and options. Stay ruthlessly focused.
• Products: Prioritise passive index tracker funds over active funds – after costs, their performance is superior. Emerging markets might be an exception. Avoid any fund with large upfront fees or management fees of more than 1 per cent. Vanguard and iShares offer very cheap ETFs with wide regional diversification. You won’t need more than two to five funds, for example:
• 50 per cent Global stocks – Vanguard FTSE All-World ETF (VWRL, 0.25 per cent)
• 20 per cent UK stocks – Vanguard FTSE 100 UCITS ETF (VUKE, 0.09 per cent)
• 30 per cent UK government bonds – iShares UK Gilts 0-5yr UCITS ETF (IGLS, 0.2 per cent)
• Transactions: Invest regularly but in large enough amounts so that transaction and currency fees aren’t more than 1 per cent. Consider investing in US dollar-denominated funds if you’re paid in dirhams. Rebalance your portfolio to maintain its asset allocation by adjusting how much of each fund you purchase. Do not try to time your purchases to what the market is doing.
Is it illegal to levy extra charges for payments made by credit card? I was paying for something the other day and didn’t have any cash on me. But when I said I would pay by credit card, the merchant said there would be a surcharge. Is that allowed? KN, Dubai
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Updated: September 23, 2016 04:00 AM