A lot of what we do at Stockopedia is based on the premise that it's not so hard for a typical investor to 'be their own fund manager' - that using the best quality fundamental data to implement a systematic approach to the stock market can reap substantial rewards over the long term. Yes you can beat the City.
But what I often hear from skeptics is that the costs of trading and rebalancing portfolios in this way are too much for an investor to bear. As ever in these things, it's best to argue with the facts so we thought we'd put together a little spreadsheet that illustrates at exactly which point it's financially worth running your own money versus sticking it in a fund.
What are the costs involved in running your own money?
Apart from time, there are several costs to running your own equity portfolio. These include the transaction costs of:
- Stamp duty/levy (typically a tax of 0.5% on purchases)
- Broker commission (a typical £10 per trade from many UK brokers)
- Bid/offer spread (what you pay to the market makers - 0.55% on average but can be just .05% for big caps but up to and beyond 1.5% for micro caps)
But there's also any self-advisory newsletter or service you might be using (in our case we will model the cost of a Stockopedia subscription at £179.99 per year).
What we've done in the spreadsheet attached is to take the above costs and model them against different equity portfolios based on the portfolio size and the number of stocks held.
Clearly as portfolio size increases the proportional costs of managing your money drop (as the fixed commission costs are proportionally lower), but as the number of stocks you own increases so do the costs of rebalancing the portfolio.
We have assumed that the portfolio turnover is 80% - that 80% of positions are bought and sold each year. This is actually the typical turnover of an average actively managed fund, so ideal for comparison, though quite possibley on the high side for an individual investor.
What are the costs of investing in a fund?
Our assumption is that we want to keep the annual cost of running our own money below 2.5% to 'beat' the cost of owning a fund. Fund expense ratios are often listed very appetisingly…