I’m new to investing and in my late 30's. I'm actually stuck in a dilemma whether to invest using DIY platforms like Interactive Investor, A J Bell or Hargreaves Lansdown OR invest using robo advisors like Nutmeg, Moneyfarm or Pensionbee. I have compared the fees and they are not significantly different. Do robo advisers have a better return rate? I can dedicate some time to DIY investing but not a significant amount of time. Please advise. Thank you.
This is a question that a lot of people ask when they decide that they'd like to begin investing.
Traditional platform or robo adviser?
If you don't have much time to spare but you want to get into DIY investing, both a robo adviser and an online investment platform offer some great simple options.
Robo advisers are currently very popular, and have recently been gaining new customers faster that the bigger online investment platforms. We found out that in the online DIY investment market almost 1 in 3 new DIY investment accounts is now opened with a robo adviser.
The robos first came about as a nice in-between product which wasn't full-blown advice, but which also wasn't so go-it-alone as DIY investing.
As a bit of quick background, a robo adviser is an online investment service which asks you around 10-15 simple questions, and then puts together a suggested suitable basket of investments from your answers. Once you've got your basket, your robo adviser will then manage this for you on an ongoing basis, rather like a portfolio manager of a traditional investment platform.
A huge benefit for new investors is that by asking you 10-15 questions and essentially providing digital advice, robo advisers are able to choose all the individual investments for you, meaning you don't need to make any of these confusing decisions yourself.
If you're looking for a newbie-friendly DIY investing option from a traditional investment platform, which won't require too much involvement - then we'd suggest you take a look at Vanguard Lifestrategy. This is a low-cost ready-made product offering investors 5 ‘multi-asset’ passive index funds to choose from. These options include differing proportions of assets such as equities and bonds, to cater to the investor's risk appetite. All investors need to do is pick the risk level they'd like.
Some of the jargon surrounding this product can sound a bit bewildering, but this is what they mean for Vanguard LifeStrategy;
- Multi-asset: This refers to Vanguard LifeStrategy's offering of five different levels of risk and potential return. They do this by using differing blends of equities and bonds across their five portfolio options.
- Passive Index Funds: An 'index fund' is a fund where, rather than a fund manager picking shares in the fund, the fund simply replicates an index such as the FTSE 100. So if HSBC makes up 2% of the FTSE 100 today, then 2% of the passive UK stocks in your portfolio will be made up of HSBC. Just be aware that index funds can masquerade under many names, including 'passive', 'exchange traded funds (ETFs)', and 'trackers'. But they all mean the same thing.
Drilling further down into the differences, here are the main pros and cons that we think distinguish robos from traditional platforms.
Robo advisers vs passive index funds at traditional investment platforms;
- At traditional investment platforms, fund managers will choose the different markets to invest in - some passive funds or ETFs often require you to decide where you want to invest – country, sector, etc.
- Robos guide you to a portfolio option, while traditional platforms rely on you to choose your own option depending on your risk appetite.
- Traditional platforms can differ in how quickly you can choose how much risk you'd like. Some such as Vanguard LifeStrategy offer a quick and simple choice, while others require you to be more involved in choosing the specific weightings within your passive funds blend.
- If you want to use passive funds or ETFs, beware that some platforms offer more simplicity than others. There can be a lot of decisions involved in using passive funds or ETFs, however offerings such as Vanguard LifeStrategy take some of these decisions off your hands.
- Both traditional passive funds and robo advisers are relatively low cost - however once you pick specific providers, all-in Vanguard LifeStrategy is cheaper than a robo adviser such as Nutmeg.
As for which gives a better rate of return...
This is pretty difficult to say definitively without giving the new robo adviser market a little more time to grow. For example, the most established robo Nutmeg, has only been around since 2011.
However, we have done some early research into this which might help:
In November 2018 we did our quarterly analysis of nine of the UK’s leading robo advisers - which you can read more on here: performance comparison of the major robo advisers. We found that higher risk investment portfolios at seven of these nine robos outperformed the FTSE 100 (and therefore passive index tracker funds) over that past 12-month and 24-month periods.
Over that 24 month period, we found that from a starting £5,000 investment, higher risk portfolios at the average robo adviser returned £5,895 (17.9%) compared to the FTSE 100 which grew to £5,862 (17.2%). However on average, medium risk robo portfolios returned 10.2% over the two years analysed, while low risk portfolios returned 2.3% - the same as a leading easy access cash ISA.
Through this research, we found that the level of risk which investors are exposed to in terms of volatility is significantly reduced in comparison to the FTSE 100, if assessed in terms of monthly swings in valuations, or monthly drawdowns.
Meanwhile, we've also done a research project for Quilter, about the effect of DIY investors' bad habits.
We found that investors who build their own portfolios can suffer from seven bad habits, which can lead them to miss out on 11.3% of potential gains a year. Our research showed that the typical unadvised investor takes a huge amount of investment risk and gets very little back for it.
These are the seven habits we identified which can reduce a DIY investors' investment return or increase their risk:
- Holding too few shares, or being ‘undiversified’.
- A bias towards the UK, ignoring the opportunities in overseas markets.
- Lack of asset allocation, using only shares when other assets could help.
- Overtrading, fiddling around the margins of their portfolios.
- Panic selling, ditching all their holdings at the first sign of trouble.
- Not rebalancing, losing out on the proven ‘Rebalancing Bonus’ returns.
- Lack of pound cost averaging - Pound cost averaging is a technique where you make investments on a regular basis and therefore average the price you pay for the total investment over time.
Ultimately as a new investor, it may be wisest to start out with a robo adviser to get a feel for things.
However if you're sure you know what's what and fancy a bit more control over your investments, we'd suggest starting with a Vanguard LifeStrategy portfolio which should be a good introduction to your DIY investing journey.
Hope this helps!
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This means we can't help with specific personal circumstances or recommend specific investment products. It also basically means that if we say something daft, you have no recourse to come back and complain.
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