Investing is a complex business, or so the investment industry would have you believe. The more complex it looks, the more likely you are to run to them for help.
And the more help you think you need, the more money the industry can make out of you in lucrative mutual fund charges and advisory fees.
It's in the industry's interests to blind with investment science. But isn't there a simple way to invest? A lazy way to invest? Something you can do yourself, without undue effort and without excessive charges? Could you, for example, invest in a single fund?
The simplest and cheapest option is to invest in a low-cost index-tracking fund. This saves you money because trackers don't employ expensive fund managers to decide which stocks to pick, but passively follow their chosen index up and down.
You'll never beat the market, but then, the market will never beat you (although you will underperform slightly after charges are deducted). Time and again, research shows that three out of four actively managed funds fail to beat their benchmark index after charges. So three times out of four, you will do better with a tracker.
The complex part is deciding which trackers to buy. Inevitably, there are thousands to choose from, including the new breed of exchange-traded funds (ETFs). You can track shares, bonds, commodities, currencies, whatever you like.
But let's keep this simple. You could track, say, Britain's FTSE 100. It's a global index, where companies earn three quarters of their profits outside the United Kingdom.
Many UAE-based investors may prefer to track the US index because it is denominated in dollars and eliminates currency risk. They could balance this with a track investing in, say, China, or emerging markets generally. ETF Securities and iShares are two of the biggest ETF fund ranges. They typically charge 0.5 per cent a year, compared with 1.5 per cent or more on most mutual funds.
That doesn't sound a big difference, but over the years, those charges add up. Say you invest US$100,000 (Dh367,320) and it grows at an average rate of 5 per cent a year. If your fund manager deducts 1.5 per cent a year, you will have $198,980 after 20 years. If your tracker charges just 0.5 per cent a year, you will end up with $241,171. That's an extra $42,191.
A fistful of global trackers could see you through. But many private investors want to do more than simply passively follow the index. They fancy a little active management in the hope it will generate higher returns. So can you get through a single fund?
Some funds do aim to be a one-stop shop, giving you a broad spread of global investments within a single mutual fund, such as Fidelity Funds International, managed by Richard Skelt, which invests across a broad spread of global stock markets, including the US, UK, Europe, Japan and China.
The drawback is that you are gambling your entire future on the fortunes of a single manager. Few investors will want to do that. But there is another way of building a wide-ranging portfolio by investing in a single fund, known as a fund of funds.
While traditional investment funds invest your money in stocks, bonds and other assets, a fund of funds invests in a range of funds from various managers. Some managers restrict their selection to their own in-house funds, others are free to choose from the full range of mutual funds on the market.
A fund of funds is ideal for investors with relatively small amounts of money who want a global reach, says James Thomas, the regional director at Acuma - Independent Financial Advice in Dubai.
"It is very difficult to build a well-diversified portfolio if you only have a relatively small amount of money to invest. Buying and selling small amounts of shares is relatively expensive and that hits performance," he says.
By carefully selecting "best of breed" managers investing in different sectors, countries and asset classes, the overall fund of funds manager aims to give you greater diversification, lower volatility and superior performance, Mr Thomas adds.
"Buying a single fund of funds keeps things simple. In fact, some clients think it is too simple, but you are getting access to a wide-ranging set of stocks and shares."
A global fund of funds could give you a choice of 20 or 30 different funds, each containing anything up to 100 different stocks. "This gives you a huge amount of diversification and range of investment within just one fund," he says.
There are scores to choose from, but Mr Thomas rates Skandia Investment Group (SIG), Schroder Global Diversified Growth and Income, and JP Morgan Global Balanced. "These invest in actively managed funds, which means there is a manager and team of analysts selecting the investments. They generally have higher charges than tracker funds, but I believe the fee is worth the cost."
Fund of funds should give you a smoother investment return than investing in a single fund because your money is spread so widely. "Individual funds may actually outperform fund of funds, but with greater risk and volatility," he says.
A good fund of funds also spares you the bother of regularly reviewing your portfolio to make sure your money is in the right place, says Roberta Faccio, the product manager at investment house Fidelity, which offers a popular fund of funds called Fidelity Multi-Asset Strategic. "The overall fund manager does that on your behalf, researching the global economy and reshuffling your portfolio to maximise opportunities and minimise threats."
Always compare charges carefully when considering fund of funds. They can be expensive because they carry a double layer of charges: one for the overall fund manager and another for the underlying funds.
The priciest have a total expense ratio of more than 2.5 per cent a year, compared with 1.5 per cent for a standard unit trust and as little as 0.3 per cent for a passive index-tracking fund.
Higher charges may be acceptable when markets are rising 10 per cent year after year, but they are much harder to justify in today's low-growth world, says Tony Stenning, the head of retail at fund manager BlackRock, which offers a low-cost fund of iShares ETFs tracking global markets.
"Fund managers can justify charging more, but only if you are getting market-beating performance in return," he says.
Another downside of fund of funds is that they still can't guarantee to beat the market, however much they charge. Performance is variable, so investors still have to monitor their fund of funds to check it is still up to scratch.
You should only take lazy investing so far, says Tim Harvey, the director of investment advisers Offshore Online.
"Investing in a single fund of funds is ideal for, say, the first $150,000. Once you have more than that, you should look at building your own portfolio, taking advice where necessary, with the aim of generating a better return."
Lazy investing has its virtues, but only up to a point.
