Investment Questionaire Help

funkey_monkey

I'm filling in a questionaire for an investment. Two of the questions are as follows:

"I would prefer my investments to grow in a way that will always beat inflation even if invested in shares that could fall in value."

"When it comes to investments my priority is to protect the money I have."


The first one I don't properly understand - is it stating that I always want to make money and am willing to undertake increased risk with volatile shares to achieve this?

The second one is slightly confusing. The dictionary definition of investment is "the action or process of investing money for profit.". So, I can't see how you can propose to make a profit whilst losing your initial amount.
I assume that it is a question about risk and how much risk you are willing to take on. My priority is to protect the initial deposit and grow it. However, I accept that there will be peaks and troughs in my investment, but that over x years the trend will be upwards.
So, I'm not sure if I am 1 ("Strongly Agree") or 5 ("Strongly disagree") or somewhere inbetween.


Thanks.

valoren

First one to me would suggest I am comfortable/interested in a major portion of my funds to be invested in Equities.
The second is that I am more interested in Bonds with a portion invested in equities.

The first option to me is saying that I understand that if you invest my money in a 'blue chip' such as a Coca Cola or a Unilever that I know that the Share price will go up and go down (knowing that it's volatile) but that over a long enough investment time frame I would reasonably expect some capital appreciation as they will be able to grow their businesses by increasing the prices of their products to sustain business growth i.e. a can of Coke isn't 5c like it was decades ago. That they will pay a dividend of their profits to me as an investor, and that the boards look at dividends as a way of matching inflation. So while the share price can potentially show that while my capital is not guaranteed to be returned to me 100% yet I wish to invest in businesses that can grow their operations/earnings/profits/dividends.

Also that I am not interested in speculative growth companies that do not intend on distributing profits, that they will retain any profits to use as a means of growing the companies operations. I understand that I don't get a cut of the action so to speak but I am looking for capital appreciation.

The second to me is focused on bonds. That I am willing to invest my money and I wish to see a return on that money. That this money is a loan to a corporation or a government and I will receive a binding return on my capital. That my capital can be returned at it's initial investment value guaranteed in lieu of any return on the investment.

FURET

These questionnaires are a form of voodoo foisted on unknowledgeable people by financial services vampires. You answer questions and by virtue of the "skill" and "expertise" of the financial adviser, they "propose" an "optimal investment strategy" to meet your "unique" needs. Once you know how to invest and once you know market history, these questionnaires seem utterly pathetic.

OP: If you want to learn about risk and reward, read the attached PDF. It will take you 30 minutes and thoroughly educate you.

Nody

funkey_monkey wrote: »

I'm filling in a questionaire for an investment. Two of the questions are as follows:

"I would prefer my investments to grow in a way that will always beat inflation even if invested in shares that could fall in value."

"When it comes to investments my priority is to protect the money I have."


The first one I don't properly understand - is it stating that I always want to make money and am willing to undertake increased risk with volatile shares to achieve this?

Pretty much yes; it also means if you have a fixed term when you need your money you may not get as much back as you originally invested.

The second one is slightly confusing. The dictionary definition of investment is "the action or process of investing money for profit.". So, I can't see how you can propose to make a profit whilst losing your initial amount.

I suggest you buy Share A; three years later they go bancrupt. You've made an investment but there is no investment that is going to be 100% risk free but there are less risky (bonds) vs higher risk (shares) vs very high risk (blanking, hedge funds etc.).

I assume that it is a question about risk and how much risk you are willing to take on. My priority is to protect the initial deposit and grow it. However, I accept that there will be peaks and troughs in my investment, but that over x years the trend will be upwards.

You say to protect it but are you ok if you don't get it back or does the investment always be returned to you no matter what? The first case would be more towards 100% stock style (highest risk with highest potential rewards) while the second would require a much more cautious approach (less return but safer).

funkey_monkey

Essentially I've got approx €100k in savings accounts earning much less than inflation. I think this money should be working harder for me. I was wanting to invest it in some other vehicle but my limited knowledge means I don't know where to start or what options to take.

My employer offered us access to a financial adviser. This person is from a reputable company. For a 0.75% management fee they would invest my funds across a range of funds and inform me every quarter of the market forecast and any recommendations for switching my funds. They would also rebalance my funds when one does well in order to maintain the spread of risk.

FURET

funkey_monkey wrote: »

Essentially I've got approx €100k in savings accounts earning much less than inflation. I think this money should be working harder for me. I was wanting to invest it in some other vehicle but my limited knowledge means I don't know where to start or what options to take.

My employer offered us access to a financial adviser. This person is from a reputable company. For a 0.75% management fee they would invest my funds across a range of funds and inform me every quarter of the market forecast and any recommendations for switching my funds. They would also rebalance my funds when one does well in order to maintain the spread of risk.

That is the adviser's fee. Each fund he invests you in will have a fee of its own, and possibly other fees as well (establishment charges, penalty charges for early withdrawal, etc.). Do not go down this road. Learn how to manage your own investments.

funkey_monkey

FURET wrote: »

Do not go down this road. Learn how to manage your own investments.

What is so bad about these managed funds?

FURET

funkey_monkey wrote: »

What is so bad about these managed funds?

They underperform the stock market average and cost waaay more than a simple, passive index fund (for example, an S&P 500 index tracker costs as low 0.07% from Vanguard. A typical managed fund costs 1.5 to 2.5%.

So let's say 100,000 invested in the stock market for 20 years at zero cost earns 9% per annum (i.e. the market on average returned 9% per annum):



We know it's impossible for someone to invest at zero cost, and because you don't know anything about investing, you outsource the responsibility to a financial vampire who charges .75% per year and invests your money in a managed fund that charges a mere 1.25% per year (.75 + 1.25 = 2%). And let's be very generous and assume this active manager managed to equal the market average over the same period of 9% per annum, from which 2% is deducted:



Ouch! That's a lot less than the market returned, isn't it? But it paid your adviser's golf club membership and financed his five star vacation in Frech Polynesia and put all his kids through Blackrock and then some.

The alternative is for you to manage your own 100k and invest it in a passive tracker that tracks, say, the S&P 500 at a mere 0.07% cost:



That's a far healthier outcome. You invested your money once and forgot about it for 20 years. No management required.

You need to find a low cost, passive index fund that is tax-sheltered (possibly wrapped in some form of pension).

Nody

funkey_monkey wrote: »

Essentially I've got approx €100k in savings accounts earning much less than inflation. I think this money should be working harder for me. I was wanting to invest it in some other vehicle but my limited knowledge means I don't know where to start or what options to take.

So how will you know if the financial advisor is giving you good advice or ripping you off? You need to learn the basics no matter what or you will be ripped off three ways to Sunday.

Secondly index funds is not really the way I'd go; the reason being an index fund will buy when the stock goes expensive (bigger part of the index) and sell when it goes down (smaller part of the index) which means your average index fund will lose money compared to if you bought the shares on January 1st and did not touch them for the full year (classic investor mistake, buy expensive and sell cheap).

Third you say you have 100k; how long can you afford not to have access to the money or are they saved for something specific (i.e. downpayment on a house, move to Australia etc.) and how good are your nerves? I'll take my own portfolio as an example to explain, two years ago? Beat index by 10%, portfolio up about 25%. Last year? Beat index by 10%, portfolio up 10%. This year so far? Portfolio is still beating the index but have lost over 10% in value and even knowing my strategy (very very long term view) it hurts seeing all that red day after day and you itch to sell (which is the wrong call). My point being it's nice to state you want it work harder and all but realize that it comes with a price (you need to learn the basics) and a risk that's higher than your proportional upside (but can be managed if you're not to greedy).

FURET

Nody wrote: »

Secondly index funds is not really the way I'd go; the reason being an index fund will buy when the stock goes expensive (bigger part of the index) and sell when it goes down (smaller part of the index) which means your average index fund will lose money compared to if you bought the shares on January 1st and did not touch them for the full year (classic investor mistake, buy expensive and sell cheap).

Very simplistic and naive advice. If it were as simple as that, we'd all be rich. Index funds get the average return at the cheapest cost and beat active funds over long periods. This is incontestable. Passively run, they get you compounded returns. Selling as you propose when the light is green creates an immediate profit, but at the devastating cost of getting less compounded growth. Quick profits are not the key to wealth creation - time in the market is the key, and an index fund is the best way of doing this for most people.

Nody

FURET wrote: »

Very simplistic and naive advice. If it were as simple as that, we'd all be rich. Index funds get the average return at the cheapest cost and beat active funds over long periods. This is incontestable. Passively run, they get you compounded returns. Selling as you propose when the light is green creates an immediate profit, but at the devastating cost of getting less compounded growth. Quick profits are not the key to wealth creation - time in the market is the key, and an index fund is the best way of doing this for most people.

Guess it depends on what you call a index fund; Vanguard which is usually used as an example for example would not work out very well.

Market Cap-Weighted Index (standard index based on stock price): Annual return of S&P 500 over trailing 20 years: 9.1%
Equally Weighted Index Annual return of S&P 500: Equal Weighted Index over trailing 20 years: 11.8%
Fundamentally Weighted Index Annual return of RAFI FTSE 1000: Fundamentally Weighted Index over trailing 20 years: 12.2%
Value Weighted Index Annual return of: Value-Weighted Index over trailing 20 years: 16.1%

I agree managed funds in general tend to be a no go but stating a standard index fund is superior is way to simplistic view of the market and that's before you start going into small cap vs. large cap (and why small cap can more easily beat large cap as a private investor), investment horizon etc. Stating buy a index fund is simply become the knee jerk reaction to anyone and everyone without taking into account the issues or requirements behind it or the issues in that investment style (at best average returns).

To OP a small book such as "The Big Secret for the Small Investor" by Joel Greenblatt will take a few hours at most to go through and understand and will quickly take you through the basic concepts.

funkey_monkey

Thanks. The really show the effects of compound interest charges on the totals. I really want to get this money in before the end of the financial year.

I know nothing about this, which have FCA status, how to transfer into an ISA wrapper, what fund to choose, etc.

I kind of feel at the minute that even with a 0.75% fee, I'd still be getting much more than the savings accounts and I could get up an running myself with a smaller amount myself to practice.

Others have told me that 0.75% is a very high management fee, but none are yet to show me something with a lower fee.

alb

funkey_monkey wrote: »

Thanks. The really show the effects of compound interest charges on the totals.

It's because if they're taking 1% it's not 1%, it's 1% of everything every year.

newacc2015

funkey_monkey wrote: »

Essentially I've got approx €100k in savings accounts earning much less than inflation. I think this money should be working harder for me. I was wanting to invest it in some other vehicle but my limited knowledge means I don't know where to start or what options to take.

My employer offered us access to a financial adviser. This person is from a reputable company. For a 0.75% management fee they would invest my funds across a range of funds and inform me every quarter of the market forecast and any recommendations for switching my funds. They would also rebalance my funds when one does well in order to maintain the spread of risk.

We dont really have inflation at the moment. Your money sitting in a bank account isnt really losing value.

None of these funds are good IMO. The more you study the stock market. The more you learn that to make an educated decision on stock you dozens and dozens of analysts analysing stocks. Even then, they rarely beat the S&P500.

There is an article in the NY Times this week. That a lot of people including Warren Buffet believe 90% of your pension should be in stocks and 10% in short term bonds. I seriously doubt any irish pension company uses that strategy.

funkey_monkey

Should I be looking at a FTSE or S&P tracker ETF? I take it ETF's are the way to go?

valoren

What did Charlie Munger say about the first $100,000?

That it's a Bitch. That to start from no seed capital and reach the $100,000 figure is the hardest part of building wealth.
You're fortunate to be in that position now. You have time and compounding of that 100k in your favour.

My advice would be to read, read, read.

Learn the difference between investing (where you are the long term owner of a business and you get a slice of the profits through a dividend) and trading (buying low/selling high get in-get out for a profit).

If I had the 100k to invest, then I would be looking at the biggest companies in the world, that have huge reserves of cash on their balance sheets, that have historically paid a quarterly dividend and that it is a rising dividend. I would take the advice of the value investors and pay a fair price (e.g. < 20 pe-ratio for example) for the stock then make a significant investment. I would re-invest the dividend every quarter for more shares, wash rinse repeat.

A conservative estimate would be 100k spread across a range of companies that increase their dividend annually would yield a conservative 3k for the year. As these companies historically raise their dividend between 8-12% then a 10% increase would give you €4,392 (after the 15% dividend withholding tax) after 5 years without re-investing or adding more capital to the 100k. After 10 years you'd be getting 7k annually. 15 years. 11k. 20 years. 18k. 25 years. 29k. Every year it is increasing. You wouldn't even have to add anything to the 100k pot. That's what Munger meant by trying to get to that 100k sweetspot. You're money would be working for you, with no input from yourself. Imagine how much more wealthy you'd be if you added in more capital and re-invested those annual dividend payments.

If pe-ratios and dividend yields don't float your boat then just buy the market with the ETF's.
But if you were to look at the holdings in the ETF itself, do you really need to pay someone a fee to tell you that a Procter and Gamble or a Johnson and Johnson is a good company? The etf itself would have a holding of companies like that anyway so why not just buy the businesses themselves? And spread your risk by diversifying across the sectors and holding long term?

It would be hard to go wrong to get wealthy when starting with 100k. Just read, read, read.

funkey_monkey

Thanks, but I need to get the money into something better soon as it has been lying in this poor savings account for too long now.

Sonnenblumen

valoren wrote: »

What did Charlie Munger say about the first $100,000?

That it's a Bitch. That to start from no seed capital and reach the $100,000 figure is the hardest part of building wealth.
You're fortunate to be in that position now. You have time and compounding of that 100k in your favour.

My advice would be to read, read, read.

Learn the difference between investing (where you are the long term owner of a business and you get a slice of the profits through a dividend) and trading (buying low/selling high get in-get out for a profit).

If I had the 100k to invest, then I would be looking at the biggest companies in the world, that have huge reserves of cash on their balance sheets, that have historically paid a quarterly dividend and that it is a rising dividend. I would take the advice of the value investors and pay a fair price (e.g. < 20 pe-ratio for example) for the stock then make a significant investment. I would re-invest the dividend every quarter for more shares, wash rinse repeat.

A conservative estimate would be 100k spread across a range of companies that increase their dividend annually would yield a conservative 3k for the year. As these companies historically raise their dividend between 8-12% then a 10% increase would give you €4,392 (after the 15% dividend withholding tax) after 5 years without re-investing or adding more capital to the 100k. After 10 years you'd be getting 7k annually. 15 years. 11k. 20 years. 18k. 25 years. 29k. Every year it is increasing. You wouldn't even have to add anything to the 100k pot. That's what Munger meant by trying to get to that 100k sweetspot. You're money would be working for you, with no input from yourself. Imagine how much more wealthy you'd be if you added in more capital and re-invested those annual dividend payments.

If pe-ratios and dividend yields don't float your boat then just buy the market with the ETF's.
But if you were to look at the holdings in the ETF itself, do you really need to pay someone a fee to tell you that a Procter and Gamble or a Johnson and Johnson is a good company? The etf itself would have a holding of companies like that anyway so why not just buy the businesses themselves? And spread your risk by diversifying across the sectors and holding long term?

It would be hard to go wrong to get wealthy when starting with 100k. Just read, read, read.

Plenty of savvy advice here!! Well said.

Sonnenblumen

funkey_monkey wrote: »

Thanks, but I need to get the money into something better soon as it has been lying in this poor savings account for too long now.

I agree with the other poster, making money with € 100k is very easy.

If you want to get going quickly, take the 100k and invest it in 20 (€ 5k/holding) Bluechip stocks (Global/European.USA) which are paying divis 3-5% pa with some capital appreciation also. I'd recommend re-investing divi payments and increasing shareholdings.

Expect a few bumps along the way, but think about the big players which are successful helping the world to eat, celebrate, keep warm, communicate and when thing s go wrong helping them recover from illness. Get my drift?

Avoid management fees, handling charges, etc greatest con/strokes in the investment world. They get paid no matter how average or bad the performance. Avoid these snake oil salespeople like the plague.

Good luck and enjoy the fun.