19 Aug 2019
You have a well diversified portfolio invested in geographically dispersed multiple asset classes. The returns are doing very favourably and you are getting returns of 9.5% Right? A great hypothetical scenario indeed.
The interest earned on an investment is usually a yearly interest figure and shows the total growth of an investment. But what we fail to remember, is that of the total interest earned, there are fund management fees that are deducted for the year, and then also the dreaded inflation that eats profits.
• Annual fund admin fees – These are usually a percentage taken for the administration and management of the fund. Fund fees differ from fund to fund.
Passive funds usually have lower fees as they simply follow the market index.
Actively managed funds may have higher fees, but are certainly more beneficial. The fund managers are constantly monitoring these funds for you, and make regular decisions and adjustments on the % multi-asset allocation of the funds, so that you receive maximum growth.
This is where investing in deVere’s fund platform is recommended. The available funds have already been carefully selected for maximum growth, and have low fees. They are globally diversified and balanced, and are actively managed by experts.
• Inflation - An economic concept, the rate of inflation is important as it represents the rate at which the real value of an investment is eroded and the loss in spending or purchasing power over time. Inflation also tells investors exactly how much of a return (in percentage terms) their investments need to make for them to maintain their standard of living. – Investopedia
An example of inflation. Jim buys a chocolate bar which costs £2. If inflation is 10%, then in theory, next year this time a chocolate bar would cost £2.20. If Jim wants to be able to afford the chocolate bar next year, then his income would need to increase by 10%.
Inflation differs from country to country and could reach double digits in countries with struggling economies.
Losing capital - example
|9.5% interest p.a||-||1.5% fund admin fees||-||4% inflation||=||4% (real capital growth|
If you are drawing a pension or monthly salary from an investment, then you have to look at how much you can safely withdraw without eating into your capital.
A safe withdrawal rate is supposed to be the amount you can spend each year without ever worrying about running out of money. This is after fund fees and inflation. If you draw more than you get in interest, then your capital will decrease. (www.thebalance.com)
In the above scenario, it is advisable to only withdraw up to 4% annually, so your capital investment remains the same and you maintain the same standard of living. Withdrawing less increases your capital, and in turn your interest earned, which could be used for an emergency or to increase your monthly payout in the future.
Tips to beat inflation and fund admin fees
• You could move investments to lower inflation rate markets
• Compare fund admin fees before committing to an investment
• Keep track of yearly interest earned – you could save the surplus for a lean year
• Consider looking at diversifying your portfolio globally – this will make your portfolio more stable and less vulnerable to domestic volatility
• You could Invest in markets, as they have traditionally protected an individuals portfolio against inflation
It is essential that you discuss any financial investment plans with your deVere adviser. [email protected]
Please note, the above is for education purposes only and does not constitute advice. You should always contact your deVere adviser for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.