Getting the best ISA & SIPP investment guidance – a 6 point checklist

Posted by Paul Sutherland on Sat, Aug 18, 2012 @ 01:30 PM

Investment guidanceMost investors seek better ISA and SIPP returns. The reason why so many investors desire higher returns is because unless they achieve good growth, they may undershoot their long-term investment aims. Missing key targets could result in them being forced to downgrade their lifestyle upon reaching retirement; a scenario many investors find completely unpalatable. These same investors also worry that if they don’t hit their objectives, they may run out of money during retirement, something many investors fear more than they fear dying*.

* 2010 poll conducted by Allianz Life Insurance Co. of North America of people aged 44 to 75 found that more than three in five (61 percent) said they fear depleting their assets more than they fear dying.

Do you do-it-yourself or get help?

Some investors decide to delegate the management of their ISA and/or SIPP portfolio to an outside source. On the other hand, you have some investors who wish to do everything themselves. We believe that both of these approaches carry too much risk. The first strategy, where you pass on the responsibility is risky because the investor is avoiding becoming financially educated, which we believe carries tremendous risk. What’s more, the investor is also putting their full trust in another party. Using this first approach, if the third party underperformed the market by a long mark, the investor’s financial future could be put at risk. 

10,000 hours to attain mastery

The second approach, the DIY route, is also risky because to become an expert in ISA and SIPP investment takes a huge amount of time and effort.  Experts tell us it can take at least 10,000 hours of study to attain mastery in a specialised field**. How are the majority of private investors going to be able to fit that amount of learning commitment into their already hectic lifestyle? This means that with the DIY approach, if the investor doesn’t put in sufficient time and effort to attain investment mastery, their decisions on which investments to buy and when to buy them could result in them missing their long-term aims by a wide margin.

**Malcolm Gladwell’s book ‘Outliers: The Story of Success’, the 10,000 hour rule theory states: to become an expert in a field of study, it takes 10,000 hour of focus and practice on the topic at hand.

Investment guidance- A possible solution

Our suggestion would be to seek help from an individual or firm who specialises in ISA and SIPP investment. Ideally you’ll want to partner with somebody that you trust implicitly, somebody who encourages you to ‘get more involved’ – but at the same time provides truly superb investment guidance. When you receive expert guidance, it helps you make better informed investment decisions. With guidance, you want somebody who can offer information that is daily, relevant, clear, concise and most of all extremely valuable. We believe that investors who have the best chance of achieving their objectives are ones that get investment guidance from specialists but ultimately take full responsibility for their investment decisions.

What to look for when seeking investment guidance: Your 6 point checklist

1)  Investment expertise

The person or firm you team up with should value ‘expertise.’ It should be one of the things that they place high value in because, when it comes to investing in ISAs and SIPPs, if you don’t have expertise you are unlikely to achieve outperformance. And if you don’t achieve outperformance, it means lower investment returns which could result in failing to hit your long-term financial objectives. The individual or firm should have real passion for their job. Do they love what they do? Their true enjoyment of what they do should ooze out of them in their communication to you.

Having a passion for their job is a start, but you do need more. Past performance does not guarantee future performance, however you should still insist on finding out if the person or firm you’re speaking to has a proven record of outperformance. Put simply, have they beaten the market averages over the long-term? If they have, they are clearly demonstrating through their results that they have a real level of expertise. You can also do a further check on their expertise by taking a closer look at their client base. Are influential, intelligent and well respected people clients of theirs?  They should have many testimonials, quotes and reviews from happy satisfied clients who verify that the person or firm is indeed an expert.

2) Find out where the expert invests

Once you’re confident that you’ve found an expert, your next job is to find out where they invest. Does this person or firm offer a service that gives you the opportunity to invest in the same funds as their expert? Are you going to be able to follow them on a daily basis? Insist on both answers being yes. Also make sure their expert invests in high quality investment funds, rather than individual stocks, because investment funds allow a wider diversification to your portfolio whilst at the same time helping to lower risk.

Also ensure that the expert you’ll be able to follow makes only one or two trades in a typical year. You want your trading activity to be infrequent or it could take up too much of your time. Ideally you’ll want to be informed throughout the year what ‘best of breed’ funds the investor currently owns, when he’s buying and when he’s exiting a trade. A service like this gives you the luxury of replicating the expert's fund choices in your own portfolio. The advantage with this kind of service is that the expert you’ll be following has their own money invested, meaning their personal capital is on the line as well as their reputation. It becomes a partnership. It’s you and them aiming to grow your wealth together. This also tells you that they are probably going to make better choices compared to an individual or firm that offers advice where they themselves have no vested interest in the funds they recommend. In other words, the adviser is not adversely affected if the funds perform poorly.

3)  Retain full control of your ISA and SIPP portfolio

As I mentioned earlier, some investors decide to completely delegate the responsibility of managing their ISA an SIPP portfolio to an outside source.  In our view, each and every investor should have the ultimate responsibility for their investment decisions. Investors should avoid a ‘bury my head in the sand’ approach and instead aim to stay active and keep involved in the full investment process. To do that would mean getting investment guidance from experts on what funds to buy, when to buy and when to exit, but at the same time you retaining full control of your account. It also means making your own trades based on the investment guidance received and ultimately managing your own portfolio. When you retain control it allows you to take on board expert guidance, look at your own personal situation in relation to that guidance, and then invest as much or as little as you like.

When you control your own account, it also means that you’ll be able to create a model portfolio perfectly suited to your own unique risk profile. For example, if the expert you were shadowing was an adventurous investor seeking higher returns, and you classed yourself as an adventurous investor, you might replicate his fund picks and asset allocations exactly to the letter.

However, staying with the expert being an adventurous investor, if you were more risk averse you may decide to invest in some of the funds the expert was investing in and place the remainder of your portfolio in a high grade corporate bond fund, helping to lower the volatility of your total portfolio. When you have the ability to follow in the footsteps of a star-performing investor, and you have full control of your account, if you know a thing or two about picking quality funds, you may decide to follow the expert with part of your portfolio, and keep some of your capital in your own personal fund picks. The rules are simple: when you give away control of your account, you are restricted and it carries more risk, however when you retain control, risk can be controlled and the possibilities are unlimited.

In our next post, we'll look at points 4-6 of our investment guidance checklist, including how the frequency and quality of guidance is critical for investors.

As always, if you have any questions or thoughts on the points I've covered, please leave a comment below or connect with us @ISACO_ on Twitter.

Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.

Find out where an expert invests

Are you an ISA or SIPP investor with over £100,000 actively invested? Are you looking for better returns but are unsure which funds to invest in? ISACO Wealth, our personal investment service, allows you to buy the same funds as a star-performing investor. You find out where he invests, keep full control of your account, enjoy a close relationship with a trusted expert, and benefit from the potential for attractive long-term returns.  

 To find out where an expert invests >>

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Topics: Better performance, ISA growth, Investment Guidance Service, Achieving your investment goals