Should I risk my nest egg in managed funds?

Having become disillusioned with 2% returns from bank and real estate (plus appreciation) I have recently had a consultation with a financial adviser in regard to other investment options. The meeting went well and the guy was very positive talking about investing the lot into managed funds etc. Obviously he did state that there are risks involved.
I am 60 yrs old and semi retired and have small weekly income of $400 pw to supplement my rental income from an apartment which I own outright. Nett Income from this is $18000 pa. So my annual income is around $35000 pa. My investment property is worth around $850000, I have $50000 in the bank and when my super matures when I am 67 it will be worth around $150000. At retirement age I will also probably receive a small part pension from the UK having worked there for 8 yrs until I was 24.
My lifestyle usually allows my funds to stay fairly stable so I'm able to live reasonably well with the current setup I have. However if I want to retire completely (say in 2 years time) which takes away my $400 pw income I need to get more out of my investments. I can sell my property without involving CGT as I have only been renting it out for 2 yrs. Then I could invest this nest egg (the guy recommended to invest the lot ie $850000) in managed funds. I have no experience in this field so want to be as knowledgeable as I can before taking any risks. Bear in mind I live with my partner in a property we own outright jointly.
I would like to get as much information and opinion from others who have taken on this kind of option. How risky is it? Can I trust a financial adviser to manage the investment for me? How much should he be charging me for his services? Are there any other costs apart from his fees? Set up fees? Tax implications? (the guy told me I would be not be paying tax on all of the interest) I got a bit lost here and was trying to understand that if I earned say $65000 in interest one year, how some of it would not be taxable. He was talking about putting some of in super at this point so maybe this was what he meant. Any help or feedback would be great. Thanks in advance.

 

welcome to InvestChat ,

let's see you have income producing property , some cash in the bank (in some type of interest-bearing account ...)

assuming you would ask for professional advice when unsure of moves , is there any reason you need somebody to formally manage your funds ??

you sound skeptical enough to track the progress of your assets , would 'hands on ' ( with advice as needed not be an option ??

your tax accountant is going to get the tough ( taxation ) questions , and the Federal Government is shifting the goal-posts at whim ( or electorate popularity )

( future ) inflation is your big enemy here , how do you calculate that , or do you stay flexible , and seize on opportunities as presented ??

you ( and your partner ) have worked , bought ( investment ) property and saved some cash ( with some assets still to mature ) , wouldn't you be better learning the 'investment game ' you are going have to oversee any thing your financial advisor sets up anyway ( because the ATO chases YOU hard , and not so hard on the professional ).

i won't say learning is easy ( but not a 8 year course at Uni either ) , but neither are legal cases v. ATO or your financial advisor .

you have considered you future income ( before the super matures ) that is an excellent start , how about fleshing out a plan of where you hope to be .. at say 70 .( and then work from there ).

next thing is dust-off an accurate reliable calculator and a pen and note book for ideas and calculations

( HINT , if it sounds complicated the ATO will come up with their own answers and they will claim divine right on accuracy regardless of the facts ... make you plan simple so even a judge can do the maths )

 

What is the advisors fee structure? Ongoing fees as a % of funds under management (FUM) or fee for time/consult?

Managed funds are not all created equally. Generally speaking you want low fees and diversity to lower risks.

With the right managed fund(s) or similar I would feel comfortable with all $850000 invested that way and maintain a cash buffer of about 2 years. General idea been that income from investments replenishes the buffer and you take your $35k pa from there, should help you ride out any storms. Even during the GFC when values dropped significantly distributions did not on Australian equities about 8% from memory.

You need about 4% return on 850k for your desired income.

I am not overly familiar with ways to take advantage of super so I won't comment other than there are likely advantages available.

Super smart money is a book worth a read given your situation. From memory it speaks about stock picking, which I would avoid. Look at low fee managed funds, index funds and old listed investment companies (biggest three - Australian foundation investment company, Argo and Milton.)

Anything high fees or too complex I'd run for the hills.

Not advice

 

I get the concept why you would use managed funds or similar, but has anybody done the maths history comparing a solid dividend paying individual share maybe a bank or WES (example only) against the top managed funds returns over the last 20-30 years?
More asking the question because I find it easier to understand a direct share than an ETF or managed fund type product.

 

managed funds v. individual shares ...

i assume the individual share(s) selected would have an active DRP scheme ( or similar ) ,so you can choose an income stream or accumulation to suit you

one main detraction for the share case is the possibility of the introduction of inferior directors ( although the consolidation in the financial services industry is bringing that risk back to an equal footing )

a change of business focus ( say WES from a coal play into a more general investment company .. food , hardware , work-wear , coal , fertilizers , etc etc ) but then your managed fund might go through a similar change say from a long/short absolute return into a multi-strategy play .

for the share argument capital gain ( or loss ) is a biggie ( but only really important when you crystallize that gain or loss ) your managed fund is playing income returns v. inflation.

i suppose the debate hinges on trust .. the regulator has been caught napping during oversight of both listed ( and unlisted ) companies as well as funds , and the investor is often 'time poor '

a stock will try buy-backs to boost EPS figures while a fund will pick a benchmark that highlights success .

i lean towards the individual share because i can personally go and get a snapshot of the business ( go shop at WOW or Big W and SEE things are not improving much , for example ) try prying open the fund manager's book-work not just the glossy presentation .

but this debate is really for the 'time-poor ' and they really are at a disadvantage , no time to crunch the figures or inspect the assets .

i hold a mix of shares interest-bearing securities ( not many of them currently ) , LICs and ETFs , and the best you can do ( imo ) is focus cash injections where they have the best mid-term prospects ( each asset class has it's good times and bad times )

 

Banks and WES have outperformed the index over that time so you would have beaten almost every fund and all indexes. If you picked a loser you could have been wiped out.

Index ETFs are easy to understand and have few pitfalls. I believe it is difficult to understand an individual company well enough to have well placed faith in it

 

but would the fund be any safer ?

i have heard stories of GFC wipe-outs ( the GFC was before i took interest in the markets ) timber and other agriculture plantations left a NASTY legacy .

at least a share often encourages some media comment .. but listening to that has it's own risks .
in this comparison i think the concept of invest and wait ( with no individual investor oversight/ monitoring ) is DANGEROUS

take the recent Peter Hall affair ( i hold HHL => PCG and HHV => PIA ) i understood Peter and his tactics and was prepared to buy into the dips but Peter jumped ship and now i effectively hold two 'black boxes ' ( God knows whet the strategy will be next month )

luckily these were NOT major holdings but what about the folks where it was a major part of their investment

each investment class has it's own pitfalls

 

Thanks, I had a chunk in a managed fund pre GFC. My ignorance is great as I couldn't even tell you which fund the money was invested in. Looking at it I do understand that funds and direct shares took a hit but because I was in managed funds more so than direct shares (blue chips anyway, disregard the punts for this conversation) there is mental scarring that needs to be dealt with at some point in time.

 

*** there is mental scarring that needs to be dealt with at some point in time.***

i have a buddy ( a skilled trader ) who suffered greatly courtesy of Babcock and Brown and ELD , and he DID have a fair knowledge at the time ( in 2007 i was still getting my head around a family loss and the fact i was going to inherit a fair stack of money ( being the black sheep any major inheritance was totally unexpected ... and i was very much a 'live for each day ' type )

being a late arrival ( to the markets ) i have tried to learn from the past ( and speed learn about economies , and finances )

i would SUGGEST one reason you haven't healed is the national ( and global ) economies haven't been repaired properly ( so some can still sense the underlying weakness in the global economy

Rudd did try the right strategy post-GFC ( pour cash into public infrastructure ) but it was done very badly , other nations just choose the wrong strategies .

one positive from arriving late ( but just in time for 2011 ) was i knew , i don't know enough ( but i had to learn quickly ).

i would never like to manage a fund for somebody else , it is hard enough to arrange your own strategy and sleep well .

using the LIC CAM ( i hold CAM ) as an example of where funds can veer from a familiar strategy , when i first bought in they went for a conservative , balanced approach ( mostly ASX blue chip + hybrid interest bearing securities ) as the peers started to out-perform it , it added selected international shares to the mix and now seems to have added trend-trading and selected stock-picking in small caps ( all in the name of keeping up with the rivals )

my dilemma is ... i bought CAM as a cornerstone ( conservative ) investment as i was taking the bigger risks elsewhere ( MQG , BTT , TPM , SHV and several others )

CAM was bought to provide 'fall-back income ' in the next crash ( when any income will be a great help ) ... but the mandate has changed ... so after such a change i next bought into BKI .. which ( sigh ) i now starting to modify it's mandate to increasingly higher risk ( and portfolio activity )

Sooooo , the very time i SHOULD be lowering my risk profile , i find my conservative investments raising theirs .

BUT it will all be the investors fault after the meltdown the assessments will be down AT meltdown moment and mum and dad investors are expected to implicitly trust the fund managers ( who are under pressure to improve performance figures ) but the mums and dads should have also seen this coming and made preparations , in a scenario where ABS statistics are a joke ( if not driven by political whim )

please note i am not flaming individual fund managers because they are put under certain pressures as well ( to out-perform their peers EVERY MONTH , EVERY YEAR ...)

so back to Buefish's original dilemma if he ( or she ) selects a managed fund WILL THE SELECTED MANDATE be welded in place ( not modified by fad and pressure over time )

 

Have you thought about investing in one of the new Vanguard ETFs? They seem to offer good options that would cover all possibilities (conservative, balanced, growth, high growth) and as you are buying the shares through a broker, you won't have to pay over the top fees to a financial planner

 

personally ... no ..

my problem is not with the managers , but with the expectations

we are near the top of the market , and yet some will expect the managers to out-perform in ( coming ) terrible times ... there is only so much a manager can do without resorting to outright criminality .

using Vanguard products as an example ( but i will invest in the issuer who offers the best package for me .. which may or may not be Vanguard or Blackrock )

i bought VAS and VHY in 2011 , and they have done fairly well for me , BUT should hard times descend on us once again , i can't expect Jack Bogle to pull out a miracle ( it wasn't in the contract when i bought in ... his contract was to shadow the index or market .. for better or worse )

should tough times befall me , it has to be MY decision what to do ( flee the market or buy more products now they are close to good value )

should the markets collapse my first glance will be at VLC ( and it's direct rivals ) next back at VAS ( and it's direct rivals ) THEN something like VHY as the dust starts to settle

the reason i avoid the complex (multi-asset class ) ETFs is the same reason i have ( currently ) very little hybrid ( and NO bond ) exposure ... bad value v. inflation risk .

diluting solid asset classes with troubled asset classes borders on folly to me ( and yes in 2011 and 2012 something like 25% of my holdings were in interest-bearing securities) when inflation risks were offset with adequate rewards several were paying over 10% pa and some with franking as well .. currently many polished up products are essentially junk debt , especially some bank issues .... unsecured debt at under 8% interest you have to be joking , if BIS , Basel and the IMF thought there was no chance of bank failure they wouldn't have created Basel III ( and IV ) regulations for all major banks to comply with ( and a 30 day buffer is hardly a certain stop-gap either )

sorry complexity does not automatically mean safety to me

LIC , IBC ( i hold ) does a fair attempt at this , shares + options + interest-bearing securities but i bet few have even looked at it , let alone researched it

 

Warren Buffett Won a $1 Million Bet, But The Real Winner is Charity

Index fund beats out actively managed fund after fees virtually every time.

 

Mathematically that must be the case, and Warren knows it, which is why he made the bet and promotes index funds for the majority. At the same time he states that there is a clear path to out-performance that doesn't require extra ordinary intelligence.

 

index investing is basically 'rear-view mirror ' stuff with the rebalancing done quickly

fees are low and losses will be lower , and inflation becomes a tailwind ( you are simply trying to NOT lose money against the index which is driven by inflation ( buy-backs and M&A activity help
as well )

i DRP most of my ETFs ... BUT without DRP participation how do they travel ???? ( in the comparison forget about the cash divs ) talk capital invested v. capital crystallized at redemption ( minus costs incurred )

with the Buffet bet he simply bet there would be 500 companies in the S&P 500 and there would be inflation over 10 years .

your active manager incurs more costs , but has more flexibility ... but which manager will have a good ten years ( for the bet )

 

Indexes are self balancing, companies coming in and out of the index are the only events - and these are at the small end of things, new funds can be fairly easily spread about or sold off, especially in large index funds.

Smart indexes are the problem children