Tyrone Zafir has managed to avoid the recent stock market ravages, by cashing in much of his portfolio at the end of the last year.
But rather than any particular insight that markets were heading for a fall, Tyrone insists his good fortune has been a matter of luck.
Tyrone , an IT director who currently lives in Switzerland, aims to choose investments that generate an income as well as preserving the value of his money for the long-term. He invests a regular amounts into an Isa each month to enjoy the benefits of a phenomenon known as pound-cost averaging whereby you buying units in an investment when it is more expensive and more when it is cheaper.
But another of his priorities is to keep his investment costs as low as possible. As a result, Tyrone invests predominantly into a portfolio of ETFs. Also known as tracker funds, these are low-cost invests which aim to mirror the performance of a given asset or stock market. Their cheap price tags, which can see investors pay annual fees as little as 0.06%, has seen these funds soar in popularity in recent years. Tyrone says he has been investing in a range of Vanguard and L&G ETFs via YouInvest, the platform run by fund supermarket AJ Bell.
A Global Portfolio
His portfolio of ETFs offers exposure to global markets across both developed and emerging economies. He has also picked ETFs to give exposure to the mid-cap market in the UK and other assets such as commodities.
His holdings include Vanguard FTSE 250 (VMID), Vanguard FTSE Developed World (VEVE), Vanguard FTSE Emerging Markets (VFEM) as well as L&G Longer Dated All Commodities ETF (COMF).
These three Vanguard ETFs are all highly rated by Morningstar: FTSE Developed World ETF has a four-star rating, while both the FTSE 250 ETF and Emerging Markets ETF have three-star ratings. The L&G ETF is unrated.
Tyrone says: “I was happy with the YouInvest service but foun the fees frustrating; any dividend paid earned in US dollars incurred a transaction fee. As a result, I was paying for buying, account maintenance, dividends and selling.”
Although this is not unusual, and YouInvest is one of the cheapest brokers in the UK, Tyrone is conscious that every fee eats into the corresponding growth a fund needs to deliver in order to recoup the costs.
Until recently, Tyrone couldn’t see any cheaper options in the UK for investing in this range of funds but last year tracker giant Vanguard launched its own investment platform. “I saw an opportunity to save money, as Vanguard doesn’t charge for buying and dividend payments are free, although there is a fee for account maintenance,” he says. As a result, Tyrone decided to sell his existing holdings and move his money across to the new platform.
When to Switch Provider
Of course, it’s important to analyse costs carefully before switching to a new fund provider, particularly as some platform will charge investors for moving their money elsewhere. Fees can also be difficult to compare across different providers as they way they charge can vary widely. Which is the best provider depends on a host of factors including the size of an investors’ portfolio, how often they trade, and they type of underlying funds they hold.
In Tyrone’s case, there was something else to consider too: “Vanguard only allows you to invest in its own funds. This is fine for me, as most of my holdings are Vanguard ETFs, but this might be an off-putting factor for other investors. The firm also doesn’t have so I am not sure yet how I will gain exposure to commodities.”
As it happened, the decision to switch fund providers meant Tyrone sold some of these holdings before the markets started to fall at the beginning of this year. He says: “The main reason for selling was due to the frustration of paying these additional fees, but it ended up being quite a lucky call.”
With the FTSE 100 still down around 20% year to date and the S&P 500 down around 13%, Tyrone hasn’t yet fully invested back into the stock market: “I am thinking about what effect the current situation may have on economies going forward,” he says. “For example, how will economies react with the increasing debt on individuals, companies and government? I am also not sure what the impact will be of the extensive money printing and investment buying that has been undertaken by many governments. Are we moving into an asset bubble? Will there be inflation or deflation and how can I mitigate against some of these risks?”
Keeping Some Powder Dry
With so much uncertainty, Tyrone is taking some time to consider which sectors, regions or companies could be likely to bounce back more quickly and which are likely to recover from the Covid-19 crisis more slowly. Keeping some powder dry also means he can take advantage of any opportunities as they arise in the coming months. The current crisis has also encouraged him to re-assess how much of his money is kept in easy access savings to cover day-to-day expenses.
“This is an issue I have thought about and discussed with my friends a lot recently,” he says. “I think you need to have cash savings that cover either your day-to-day living expenses or salary over a six to 12-month period. This is a lot to save, but I believe it’s valuable in bringing short-term security. It pays to start small, reducing the number of times you eat out for example and putting some of this money aside for a rainy day.”
