The Little Book of TCFTen things everyone should know about investing
About TCF InvestmentWho we areWe are a fund management business based in Kent (because it is muchcheaper than the City of London). We are wholly focused on deliveringlow cost, multi-asset investment products to UK advisers and their clients.Our clientsOur clients are all types of investors: large and small, seeking transparent,consistent and fairly priced funds for their ISAs, pensions and investments.Our peopleWe have used our significant and extensive experience to challenge therules of fund management to provide smart, low cost simple solutionsto 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.
ForewordInvestment is a scary subject to many people.It involves your hard earned savings and hasrisk and complexity. But there are a numberof tips that can help everyone to makesmarter investments. We use them whenwe run our Total Clarity funds.At TCF Investment we invest money but do not give individualfinancial advice, so make sure you speak to your own financialadviser to discuss your specific circumstances.However, please use these top tips to guide you when decidingwhat to invest in and they should help to ensure you are on theright path.And, as a little endorsement we have added some quotes fromsome recognised industry names, Nobel Prize winners and a cat!
Get the big rocks in place firstDeciding the amount to invest between different types ofassets, such as equities and bonds, is far more important 1 Top Tipto your long-term return than deciding on which share orindividual fund to buy. This is called asset allocation.This is the foundation of successful long-term investing. important!“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
Stay off the road to nowhereStart with the end in mind. Unless you know what you areaiming at, how will you know whether you are on track? 2 Top TipIt is no different with investment. It is important tounderstand your goals, the amount of risk you areprepared to take (how big the ups and downs alongthe way can be), how long you have to invest for,etcetera before you set off.If you are not sure, then some independent professionaladvice is a good first step.“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
Beware the cost monstersAsk what the fund is going to cost you, not just how it is expected 3 Top Tipto perform. Remember, every pound that is eaten up by costsis a pound that is not invested and this can lead to an awfulamount 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) TER Total Expense Ratio Eats your fund PTR Portfolio Turnover Rate Eats your performance AMC Annual Management Charge Eats your fund – pays your manager “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
Don’t be fooled by the adverts!The billboards are full of outperformance claims of star fundmanagers. But the reality is very different. On average mostfund managers struggle to beat the market index that is theirbenchmark (largely because their costs are too high).For most people, a well diversified portfolio of passive/index funds 4 Top Tipwill 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 index UK Equity -1.3% pa Europe ex UK Equity -1.2% pa US Equity -1.5% pa Asia ex Japan Equity 0.6% pa Japan Equity -2.6% pa Global Equity -1.5% pa Emerging Market Equity -2.7% pa UK Gilts -0.7% pa UK Index-linked Gilt -0.6% pa Property -3.1% pa Source: SCM Private Morningstar. 5 year annualised to end Feb 2010 FTSE Indices except Property – IPD All Property Index“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
Avoid the madness of crowdsMost investors fall into the trap of buying high and selling low. 5 Top TipStudy the chart below. The bars show the amount of money thatUK individual investors put in the market each year while the linechart shows the year end closing value of the FTSE 100 Index.The shapes are very similar because most investors tend to rushto invest after the markets have risen and pull back when theyare doing badly.Ideally it is much better to buy low and sell high, but as no-oneknows what the market is going to do, it is best to stick to asensible long-term plan and invest in a diverse set of assets. 25,000 Amount invested 7,000 FTSE 100 6,500 20,000 6,000 FTSE 100 Year-end Close Amount invested – £m 5,500 15,000 5,000 4,500 10,000 4,000 3,500 5,000 3,000 0 2,500 2000 2002 2003 2004 2005 2006 2007 2008 2009 1992 1993 1994 1995 1996 1997 1998 1999 2001 Source: IMA“The time to buy is when there’s blood in the streets.”Baron Rothschild, an 18th century British nobleman. Rothschild made a fortunebuying in the panic that followed the Battle of Waterloo against Napoleon.
Don’t put all your eggs in one basketWe all know that there’s no such thing as a free lunch butthere’s also no such thing as a sure-fire bet on the stock market. 6 Top TipEven the most fantastic looking investment opportunities canand do go wrong.Therefore make sure that you own a good spread of investmentsas the best way to spread your risks. This is called diversifying.Remember also that not all types of investments move in thesame direction at the same time.So when one part of your portfolio is doing badly, you shouldbe comforted that other bits of it are doing well.“Diversifying between asset class portfolios as well as within portfolios is more “efficient” 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
Balancing actDifferent markets will grow at different rates 7 Top Tipover time. This means that the amount you haveinvested in different markets will change which willmake your portfolio drift away from your originallong term investment plan.It makes sense to bring everything back into lineoccasionally – but not too often as it costs moneyto do. This is called rebalancing.Best advice says not more than quarterly, probablyat least annually. Equities Bonds“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
Top Tip 8Don’t be shyWhen you go to buy a refrigerator you understand whatit is supposed to do for you, how much it costs, howmuch it costs to run, and what happens if it goes wrong.Same goes for investment. It is worth asking the dumbquestions to really find out what you are investing in.Or, if not, pay someone who is expert and independentto find out for you. As many people learned to their costin the credit crunch, financial products are designedby some very clever people. Unfortunately they aren’talways so clever when it comes to explaining the risks.Make sure you know what you are investing in… Cash fundsif in doubt before jumping in ask for help. Deriv Bonds ative s Equitie s ty Proper“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
Time and time againMarkets are volatile so one way to invest is 9 Top Tipto drip-feed your money into the market overa period of time.If you are very risk averse, regular savingis a good way to invest as it slowly adds yourmoney to the market rather than investingall in one go, smoothing the up and downsof your investment. But don’t forget, less riskmeans less return in the long run.“Little and often fills the purse.”Proverb
Ensure interests are alignedMake sure that you trust your adviser. Most will happilyspend an initial hour with you for free. 10 Top TipTry 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 outif the manager invests a significant amount of their ownmoney in the funds they run. It’s a simple way of seeingif 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 BonusThere are lots of companies giving awards, stars Top Tipand “A”s for performance. But do they work?Research published in 2010 by fund ratings agencyMorningstar in the US, looked at what the best predictorsof future performance were.They looked at their own ratings and other factors from2005 to 2008 to see what was the best predictor of 2009and 2010 performance:“If there’s anything in the whole world of mutual funds thatyou can take to the bank, it’s that expense ratios help youmake a better decision. In every single time period anddata point tested, low-cost funds beat high-cost funds.”They concluded:“Investors should make expense ratios a primary test infund selection. They are still the most dependable predictorof performance.”“To pay no attention to costs is probably the biggest dumb mistake investors can make.”John Bogle. Founder Vanguard. FT 02/03/2009
Summary1. Get the big rocks in placeThe importance of asset allocation2. Stay off the road to nowhereKnow your end goals3. Beware the cost monstersHigher costs means less of your money working for you4. Don’t be fooled by the adverts!Past performance really isn’t a good guide to the future5. Avoid the madness of the crowdsDon’t fall into the trap of buying high and selling low6. Don’t put all your eggs in one basketReduce risks by a mix of assets7. Balancing actRebalance your portfolio over time8. Don’t be shyMake sure you know what you are investing in9. Time and time againIf you are nervous don’t invest all in one go10. Ensure interests are alignedDo you trust your adviser?Bonus. The answer is not in the starsLow costs are a good predictor of better performance in the future
How do I find out more?Other places to go for help:The Total Clarity funds we manage are available mainlythrough financial advisers. They will be able to tell youmore about how to buy and sell shares in the funds.To find an adviser:www.unbiased.comwww.mylocaladviser.co.ukwww.financialplanning.org.ukFor some free guides from the FSA:www.moneymadeclear.fsa.gov.ukWebsite links:www.tcfinvestment.comThe little book of TCF is not investment, legal, credit, accounting or tax advice, or a guide to suitableinvestments appropriate to your individual goals.The price and value of investments can go down as well as up, and you may not recover the amountof your original investment. Past performance really isn’t a guide to future performance. 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