DIY investors have several alternative channels for investing in equities. The most hands-off is to invest in managed funds, or a managed discretionary account (MDA), where all investment decisions and actions are made for you. On the other extreme is to purchase investment software that offers a proven investment strategy, where you are responsible for your own investment decisions and execution. In the middle-ground is Research & Investment, where no decision-making is required — other than to invest in a subscription — but you are required to execute your own trades in the market.
Here we compare the relative costs and effort required for each investment channel using a standard investment of $100,000:
||$2,000 to $3,000
|Ongoing monthly cost:
||$100 to $200
||$50 to $100
|Performance fees (above index benchmark):
||Up to 22%
|Time & Effort required:
||2 to 3 hours/month
||0 to 1 hours/month
||2 to 3 hours/day
|Mobility & Freedom of movement:
|Detachment & Freedom from emotional pressure and external influences:
||5 to 10 years
|Typical Number of Stocks:
||10 to 20
||Suitable for lower tax vehicles such as super funds.
||500 to 1000
||Medium to High
||Low to High
||Low to High
Upfront costs are for purchase of investment software.
Monthly costs include R&I subscriptions, management and platform fees for MDAs (from 1.2% to 2.4% of net assets), and data costs for investment software.
Performance fees are calculated on outperformance above a suitable benchmark like the ASX 200 Accumulation Index.
Time required for R&I is to review the update and implement the portfolio changes, normally once a month. A managed account merely requires you to review performance. Investment software normally requires daily scans of the market, review of charts and placing trades with your broker.
Complexity with R&I is limited to reading the updates and placing trades with your broker. A managed account merely requires you to review performance. But investment software requires complex installation and mastery of the operating rules.
Mobility is a problem if you are on holiday or work away from home and need to access your system. R&I requires you to login once a month to receive updates and then place any trades with an online broker. A managed account requires no monthly intervention. Investment software normally requires daily access to the database on your computer to perform scans and daily access to an online broker.
Detachment is achieved if you have a managed account: someone else makes the decisions for you. R&I is a rules-based strategy and requires you to ignore external influences and adhere to the system, implementing all trades. Because of the level of involvement required with investment software, detachment is difficult and investors often stray from the prescribed rules.
Investment time frame is the same for all three vehicles.
Recommended leverage is zero because of volatility of returns.
Typical number of stocks is 10 to 20. R&I is a high conviction strategy, selecting a smaller number of stocks in order to achieve outperformance. Some funds and software follow a similar path, while some erode performance through over-diversification (di-worsification as Warren Buffett calls it).
Tax implications are the same: active strategies do not maximise capital gains tax concessions and require a low tax vehicle such as a SMSF.
Subscriber limits are enforced by R&I to protect performance: too many investors using the same system would affect entry/exit prices and erode returns. Some managed funds are closed or capped, but most are not.
Performance of all three investment alternatives is variable, but by pursuing a high conviction strategy and following a strict, rules-based approach, R&I investors are more likely to outperform the relevant index benchmarks.
We hope you find this comparison useful. To find out more:
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