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The Little Book of TCF
Ten things everyone should know about investing
Who we are
We are a fund management business based in Kent (because it is much cheaper than the City of London). We are wholly focused on delivering low cost, multi-asset investment products to UK advisers and their clients.
Our clients
Our clients are all types of investors: large and small, seeking transparent, consistent and fairly priced funds for their ISAs, pensions and investments.
Our people
We have used our significant and extensive experience to challenge the rules of fund management to provide smart, low cost simple solutions to today’s investment challenges.
Our difference
We invest our own savings in our funds.
Our funds get cheaper as they grow – because that’s fairer.
Low cost, safe, and transparent are our watchwords.
We never forget whose money we are looking after.
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About TCF Investment
Foreword
Investment is a scary subject to many people. It involves your hard earned savings and has risk and complexity. But there are a number of tips that can help everyone to make smarter investments. We use them when we run our Total Clarity funds.
At TCF Investment we invest money but do not give individual financial advice, so make sure you speak to your own financial adviser to discuss your specific circumstances.
However, please use these top tips to guide you when deciding what to invest in and they should help to ensure you are on the right path.
And, as a little endorsement we have added some quotes from some recognised industry names, Nobel Prize winners and a cat!
Get the big rocks in place first
Deciding the amount to invest between different types of assets, such as equities and bonds, is far more important to your long-term return than deciding on which share or individual fund to buy. This is called asset allocation.
This is the foundation of successful long-term investing.
“The asset allocation decision is by far the most important
factor in determining long term returns.”
Sandler Review: Medium and Long-Term Retail Savings in the UK – July 2002
Top Tip
1
important!
Stay off the road to nowhere
“Would you tell me, please which way
I ought to go from here?”
“That depends a good deal on where you
want to get to” said the cat.
The Cheshire Cat. Alice in Wonderland. Lewis Carroll
Start with the end in mind. Unless you know what you are aiming at, how will you know whether you are on track?
It is no different with investment. It is important to understand your goals, the amount of risk you are prepared to take (how big the ups and downs along the way can be), how long you have to invest for, etcetera before you set off.
If you are not sure, then some independent professional advice is a good first step.
Top Tip
2
TER Total Expense Ratio
Eats your fund
PTR Portfolio Turnover Rate
Eats your performance
AMC Annual Management Charge
Eats your fund – pays your manager
Beware the cost monsters Top Tip3Ask what the fund is going to cost you, not just how it is expected to perform. Remember, every pound that is eaten up by costs is a pound that is not invested and this can lead to an awful amount of money being lost over time.
Cheaper funds have, and continue to have, an in-built performance advantage. There are three sets of costs you need to know about:
Beware the Three Letter Acronyms (TLAs)
“It is difficult to systematically beat the market; it
is not difficult to systematically throw money down
a rat hole generating commissions (and other costs).”
Michael C. Jensen. Harvard University
Top Tip4
“Most investors, both institutional and individual, will find
that the best way to own common stocks is through an index
fund that charges minimal fees. Those following this path
are sure to beat the net results (after fees and expenses)
delivered by the vast majority of investment professionals.”
Warren Buffett, Chairman, Berkshire Hathaway
Don’t be fooled by the adverts!
The billboards are full of outperformance claims of star fund managers. But the reality is very different. On average most fund managers struggle to beat the market index that is their benchmark (largely because their costs are too high).
For most people, a well diversified portfolio of passive/index funds will be the best way to grow their investments in the long run.
5 year annualised returns – average funds vs the index
IMA Sector Performance vs FTSE indexUK Equity -1.3% paEurope ex UK Equity -1.2% paUS Equity -1.5% paAsia ex Japan Equity 0.6% paJapan Equity -2.6% paGlobal Equity -1.5% paEmerging Market Equity -2.7% paUK Gilts -0.7% paUK Index-linked Gilt -0.6% paProperty -3.1% pa
Source: SCM PrivateMorningstar. 5 year annualised to end Feb 2010FTSE Indices except Property – IPD All Property Index
Avoid the madness of crowds Top Tip5Most investors fall into the trap of buying high and selling low. Study the chart below. The bars show the amount of money that UK individual investors put in the market each year while the line chart shows the year end closing value of the FTSE 100 Index. The shapes are very similar because most investors tend to rush to invest after the markets have risen and pull back when they are doing badly.
Ideally it is much better to buy low and sell high, but as no-one knows what the market is going to do, it is best to stick to a sensible long-term plan and invest in a diverse set of assets.
“The time to buy is when there’s blood in the streets.”
Baron Rothschild, an 18th century British nobleman. Rothschild made a fortune
buying in the panic that followed the Battle of Waterloo against Napoleon.
25,000
20,000
15,000
10,000
5,000
7,0006,5006,0005,5005,0004,5004,0003,5003,0002,5000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Am
ount
inv
este
d –
£m
FTS
E 10
0 Ye
ar-e
nd C
lose
Source: IMA
Amount investedFTSE 100
Don’t put all your eggs in one basket Top Tip
6We all know that there’s no such thing as a free lunch but there’s also no such thing as a sure-fi re bet on the stock market. Even the most fantastic looking investment opportunities can and do go wrong.
Therefore make sure that you own a good spread of investments as the best way to spread your risks. This is called diversifying. Remember also that not all types of investments move in the same direction at the same time.
So when one part of your portfolio is doing badly, you should be comforted that other bits of it are doing well.
“Diversifying between asset class portfolios as well as within portfolios
is more “effi cient” than doing only one of those, or neither.”
H.Markowitz*, M.Hebner, M. Brunson. Does Portfolio Theory Work During Crises? July 2009
*Nobel prize winner
Different markets will grow at different rates over time. This means that the amount you have invested in different markets will change which will make your portfolio drift away from your original long term investment plan.
It makes sense to bring everything back into line occasionally – but not too often as it costs money to do. This is called rebalancing.
Best advice says not more than quarterly, probably at least annually.
Balancing act Top Tip7
“The bottom line is it’s your hard-earned money. You should pay
attention to it over time. ...If your approach is, “I’m not going
to pay attention to it," then it is your fault that it doesn’t work.”
Certified Financial Planner Jon L. Ten Haagen
Equities
Bonds
When you go to buy a refrigerator you understand what it is supposed to do for you, how much it costs, how much it costs to run, and what happens if it goes wrong.
Same goes for investment. It is worth asking the dumb questions to really find out what you are investing in. Or, if not, pay someone who is expert and independent to find out for you. As many people learned to their cost in the credit crunch, financial products are designed by some very clever people. Unfortunately they aren’t always so clever when it comes to explaining the risks.
Make sure you know what you are investing in… if in doubt before jumping in ask for help.
“People spend more time and effort to buy the right refrigerator
than they do to buy the right funds."
Peter Lynch, Legendary Manager of Fidelity’s Magellan
Don’t be shy Top Tip
8
Equities
BondsDerivatives
Cash funds
Property
Time and time again Top Tip9Markets are volatile so one way to invest is to drip-feed your money into the market over a period of time.
If you are very risk averse, regular saving is a good way to invest as it slowly adds your money to the market rather than investing all in one go, smoothing the up and downs of your investment. But don’t forget, less risk means less return in the long run.
“Little and often fills the purse.”
Proverb
Ensure interests are aligned Top Tip10Make sure that you trust your adviser. Most will happily spend an initial hour with you for free.
Try a few out until you find one on your wavelength – it’s your money so it makes sense to get it right.
And when you invest we think it is a good idea to find out if the manager invests a significant amount of their own money in the funds they run. It’s a simple way of seeing if your interests are aligned.
Is their money where their mouth is?
“Wall Street is the only place that people ride to in a Rolls Royce
to get advice from those who take the subway.”
Warren Buffett, Chairman, Berkshire Hathaway
The answer is not in the stars
There are lots of companies giving awards, stars and “A”s for performance. But do they work?
Research published in 2010 by fund ratings agency Morningstar in the US, looked at what the best predictors of future performance were.
They looked at their own ratings and other factors from 2005 to 2008 to see what was the best predictor of 2009 and 2010 performance:
“If there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision. In every single time period and data point tested, low-cost funds beat high-cost funds.”
They concluded:
“Investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”
BonusTop Tip
“To pay no attention to costs is probably the
biggest dumb mistake investors can make.”
John Bogle. Founder Vanguard. FT 02/03/2009
Summary
1. Get the big rocks in place The importance of asset allocation
2. Stay off the road to nowhere Know your end goals
3. Beware the cost monsters Higher costs means less of your money working for you
4. Don’t be fooled by the adverts! Past performance really isn’t a good guide to the future
5. Avoid the madness of the crowds Don’t fall into the trap of buying high and selling low
6. Don’t put all your eggs in one basket Reduce risks by a mix of assets
7. Balancing act Rebalance your portfolio over time
8. Don’t be shy Make sure you know what you are investing in
9. Time and time again If you are nervous don’t invest all in one go
10. Ensure interests are aligned Do you trust your adviser?
Bonus. The answer is not in the stars Low costs are a good predictor of better performance in the future
Other places to go for help:
The Total Clarity funds we manage are available mainly through financial advisers. They will be able to tell you more about how to buy and sell shares in the funds.
To find an adviser: www.unbiased.com www.mylocaladviser.co.uk www.financialplanning.org.uk
For some free guides from the FSA: www.moneymadeclear.fsa.gov.uk
Website links: www.tcfinvestment.com
Issued by TCF Fund Managers LLP. TCF Fund Managers LLP is Authorised and Regulated by the Financial Services Authority. TCF Investment is a trading name of TCF Fund Managers LLP. The TCF Investment logo is a trademark of TCF Fund Managers LLP. TCF Fund Managers LLP is registered in England and Wales number OC305442. Its registered office is First Floor, 7 Bligh’s Walk, Bligh’s Meadow, Sevenoaks, TN13 1DB
How do I find out more?
The little book of TCF is not investment, legal, credit, accounting or tax advice, or a guide to suitable investments appropriate to your individual goals.
The price and value of investments can go down as well as up, and you may not recover the amount of your original investment. Past performance really isn’t a guide to future performance.