The investment advice industry problem

By Stephen Sutherland, author of Liquid Millionaire.
Posted in the Category of ISAS, SIPPS, Investing, Performance on 4th December, 2011.
Tags: bull market, institutional investors, isaco, liquid millionaire, market health, market indexes, nasdaq composite, russell indexes, s & p 600, stock market, stock market summary.

The investment advice industry problem

As you are probably aware, I am the lead investor for ISACO’s Shadow Investing which is a unique investment guidance service aimed at ISA and pension investors with £100,000 portfolios.

The main objective of Shadow Investing is to beat the stock market. My benchmark to beat is the Nasdaq Composite. If like our clients you seek long-term capital growth, your aim should always be to beat the stock market.

If you don’t beat the market, it means it’s going to take you longer to get to your retirement goals as you can see from this table below.

This table highlights the dangers and shows what happens to your retirement plans if you underperform. In this example, we’ve used a person with a £250,000 portfolio whose aim is to grow it into a million pounds over the next ten years.

Starting amount	Retirement goal	Annual growth rate	Time frame taken to hit retirement goal	Arrived at goal on time?
£250,000	£1 million	15%	10 years	Yes
£250,000	£1 million	7.5%	20 years	No, 10 years late.
£250,000	£1 million	3.75%	40 years	No, 30 years late.

To be able to do that successfully, the person would have to grow their account at 15% per year which I agree is no easy feat. However, it is possible when you have an edge.

The compounding rule is, when you get 15% annual growth, your money doubles every five years. That means at 15% annual growth £250,000 turns into £500,000 in the first five years, and the £500,000 turns into a £1million in the final five years.

However, if you fail to get adequate growth on your capital, it is going to take you much longer to reach your retirement goals.

For example, if your adviser is one of the 80-90% of advisers that underperform the market, and helps you to achieve just 7.5% annual growth, it would take you twice as long to get to your goal. Instead of getting to your objective in ten years, it would take you twenty. And if your adviser was in the bottom 20% of their field, and only managed to help you achieve 3.75% annual growth, it would take you forty years to get to your goal. That’s thirty years late!

For some people, the risk of their adviser underperforming is too high. When a person realises the danger of underperformance, and how it will have an adverse effect on their financial future, their next step is to seek out help and guidance from a person or company with a history of beating the stock market.

If an individuals’ adviser is of one of the 80-90% who underperform the market, by staying with him or her, the person could be putting their family’s future welfare in danger.

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Would you be interested in learning what I’m invested in so that you could copy me? To find out how you can Shadow Invest me click here. You can email us or call 0800 170 7750 if you prefer.