| Real Life Strategies for Building Wealth

 

Regular readers will recall that, having disposed of our consumer debt, we have been making thinking about how to invest money.  At the moment we have no particular aim and just want somewhere to store money while thinking about serious investment opportunities.

We found Nutmeg and reviewed it in February this year.  So we have been trying it to see how it works.

Nutmeg is a platform where you set up a fund – there is no real limit to the number of funds but the initial investment per fund must be at least £1000.  You set the level of risk for each fund on a 10 point scale, your timescale and hand over your cash.  It seems simple – and it is.

The general idea is that money from each fund goes into a few common pots according to the fund profile.  Twice a month, these pots will be invested, rebalanced, etc.  Rather than invest in individual stocks, Nutmeg trades in Exchange Traded Funds which are more liquid and have minimum transaction charges.  So instead of thousands of individual portfolios being handled, Nutmeg work with relatively few and (hopefully) this enables them to give more attention to them.  After all, most of us have pretty much the same requirements – somewhere reasonably safe to store our money.  If we want absolute safety, we would leave it in a bank (well, perhaps ‘absolute’ is no longer appropriate these days).  But we are prepared to take a small risk.

To us amateurs it looked the business and conversations with Nutmeg were very helpful in understanding the ins and outs of the procedure.

(Note: You can find the latest update to this post further down.)

So we took the plunge and added first £1000 then a further £3000 before the end of the last tax year.  Since then we have added a further £8000.  These were put into an ISA – a tax free wrapper.  We set a 5 year time frame and a risk level of 7.

Previously people had to choose between an execution-only service – you choose what to buy and the broker carries out the deal, trousering a large sum for this almost automatic task – or you hand it all over to someone to ‘manage’ it for you, again costing the earth.  There are ‘in-between’ systems where you get suggestions and either follow them or not but all this seems to be too complex unless you are going to drill into every suggestion to see how well it stacks up.

As I wrote recently, stockbrokers have got themselves a bad name for excessive charges and inconvenience.  Nutmeg’s charges are simple and transparent – between 0.3% and 1% is all they charge.

It seems we are not alone in our thinking.  Economist John Kay has also invested quite substantially, as this piece from City Wire noted.  He commented that people were looking for better and cheaper intermediation – the process that brokers and the like provide.

So for a total of £12000 invested, how has it done?

I downloaded the daily outcomes since the beginning of April.  Of course these are all over the place but I wanted a sensible comparison.  The website just gives a percentage gain over the investment, which isn’t very useful – the current ‘profit’ is 1.57% but in reality, (a) it has been invested over a lot less than a year and (b) the funds have been added progressively.

The obvious comparison is the annualised rate of return – for any day’s outcome, what is the effective annual interest rate?  These is shown in the figure at the top of this post.

The solid line shows the straight percentage return on investment against the date.  In the early days, the ROI dipped down to -30% before rising to over 30%.  This early volatility is to be expected – whatever the variation, factoring it up to an annualised number will amplify the changes.   Eventually it settled down to a range from 4.4% to 9.5%.  There appears to be an approximately monthly period on the values – which presumably is because of the regular investment cycle.

However, new money is held as cash pending the investment cycle so a longer term trend should be slightly higher.  Allowing 10 days for the investments to be made (a minute BoE level interest is paid on cash), the annualised return over the past month changes to between 4.9% and 11%, shown by the dashed line.  The initial ROIs are much more volatile simply because they are considered over many fewer days but they settle down to be very close – but slightly higher.

If the most recent returns carry on and we make no further investment, then we should have increased our £12,000 by £478 or £527 respectively by the end of this year.  Not startling but rather better than leaving it in the bank.

This is broadly what was expected – and substantially more than available from ordinary cash ISAs.  It includes the management fee which is 1% – currently £26.23 plus £5.25 VAT.  There are no further fees and as we increase our investments, these will drop down to 0.3%.

Complications

We did have a little problem to start with trying to add money but that was in substantial part because we were overseas at the time on a poor connection.  Then we set up a payment system so we can direct money from our bank account and that worked OK but at the moment if you have more than one fund, the target fund cannot be specified when the money is sent – you need to login to allocate the money.  We would also like to have a joint ISA account which should be technically possible as the ISA allocation is not actually made until the end of the tax year but that is not available (yet) and have a pension fund (a SIPP) under the same system – again this is something that we hope will come.

We haven’t yet tried to draw funds out but are assured that this is free as long as we wait for the rebalancing time – a very sore point with us at the moment.

Conclusions

Nutmeg is a simple and elegant approach and does not rip you off.  Once our roof is done and paid for (and possibly solar panels if we can afford it) we will use Nutmeg for passive investment pending some really good ideas to build our serious nest egg.

We have added an Excel spreadsheet tool that contains our present figures to the Tools page – go play with it!

Nutmeg investment review – Update March 2017

We have not updated this review of our Nutmeg investment for some-time now and given that it is March and many of you are looking to open or move their ISAs we felt it is time.

First things first. After we were confident that investing in a Nutmeg stocks and shares ISA is not going to lose us our money – we are as prone to ‘loss aversion’ as the next person – we opened an account for Maria as well. So currently, we have two Nutmeg ISAs: John’s is called ‘Mortgage payment’ and Maria’s is known as ‘Freedom Fund’. (This is just a reflection of our different personalities.

Our pots have grown substantially since their modest beginning but before we get into that let me update you on some changes Nutmeg have introduced.

Important changes to Nutmeg

Nutmeg have been changing things on the margin all the time since their inception. Here we draw your attention to three changes that are important to keep in mind and that affect your investments.

#1. Nutmeg investment reduced their fee

Nutmeg used to charge 1% fee on portfolios up to £20,000 (and gradually reducing the fee after that). While this didn’t sound too bad when compared to the fees – obvious and hidden – investors pay for actively managed mutual funds, this was still a tad below par when compared to what the cheaper index funds charge.

Several months back Nutmeg reduced its fee to 0.75% for up to £100,000 portfolios (and I’d expect this to go even lower over the next year or so). Doesn’t seem much but in the long run this can have a very large effect on the size of your portfolio.

#2. Nutmeg invest your money once a week

Another important in the long run change is that Nutmeg started investing (and re-balancing) your portfolio once a week. This, I find, offers much more flexibility and potentially better returns. This is because when you top up your account – or after a dividend – the cash doesn’t knock about in the account doing nothing.

#3. Nutmeg offer pensions (SIPPs)

When we first started investing in Nutmeg they didn’t offer pensions. Now they offer SIPPs (Self Invested Personal Pension). As is customary with Nutmeg, the fees are kept low – 0.75% up to £100,000 and 0.35% after that. Also, there is a minimum amount you’d need to open a SIPP which at the moment is £5,000.

How did our Nutmeg ISAs do?

Okay. We all know that the last couple of years have been volatile time and the stock market has been going up and down as a yo-yo. Naturally, it has been a volatile time for all stocks and shares investments including ISAs.

Last February, for instance, thing got so trying that even I was tempted to sell out and keep our money in gold coins, deeply buried under the mattress. I didn’t succumb and I even wrote to tell you why I still love Nutmeg enough to stay with them. And you won’t even believe how pleased I am that I stayed. But we’ll get there.

Our little Nutmeg experiment

Here are the profiles of our Nutmeg portfolios. At the moment, mine (Maria) is set on risk level 8 and John’s is on risk level 7. Until about three months ago, my portfolio was set on risk level 7 and John’s on risk level 5.

(The squiggly lighter green line is the interest and the darker green one is the contribution.)

Maria’s ISA

Nutmeg investment

John’s ISA

Nutmeg investment

Now, let’s compare the two profiles. Here is what transpires:

  • Both portfolios are returning well; or at least much better than any other ISA around. Let’s just say that since the beginning of 2017 John’s portfolio has returned 2.55% and mine has returned 3.52%. (I think that this difference is because John’s was still on risk setting 5 (lower proportion of equities) during January and part of February; and this was a time when equities did very well.)
  • Interestingly, John’s portfolio is the one that was more stable in the time of volatility. Over its life-time, John’s portfolio fell below the contribution once in June 2013 (-3.08%). You can see that my portfolio dipped below contribution several times and the largest fall was in February 2016 (-4.36).
  • Our portfolios recovered every time. In fact, most of the time they run on healthy profit.

Where is the experiment, you may ask?

Well, it seems that over time a Nutmeg portfolio on a lower risk setting is more stable than a portfolio on a higher risk level. Still, in the long run a portfolio at a higher risk level can be expected to yield higher returns.

How to set the risk level?

Readers have been asking me how to set the risk level on their Nutmeg portfolio. There are two answers to this questions.

First, Nutmeg have a questionnaire that will help you understand your risk tolerance level. You can use this to set the risk level on your portfolio.

Second, I’d say that the risk level you set would depend on:

  • Your time horizon. Set your risk level low if you foresee using the funds in your Nutmeg account pretty soon (in the next year or so). If, on the other hand, you don’t foresee an urgent need to use the money for over ten years, you should set it to a higher level of risk – remember that this affect the ‘swings’ of your portfolio but the long-term tendency is up.
  • How you cope with your fear of loss. If of loss is perfectly natural and we all share it. Some of us are better at managing our fear of loss. If you can’t cope with fear of loss have your risk level set lower – because your portfolio will be more stable, you would be unlikely to get out of it when you shouldn’t (generally, people who are not good with controlling their fear of loss, sell when the market is down; the rest of us, live through it and live to see another upturn.)

Maxing out our Nutmeg ISAs

This year, John and I have maxed out our Nutmeg ISAs. (ISA allowance for 2016-2017 is £15,240.) We intend to do this next year as well and see how it goes after that.

Do you know why we are doing this?

There are two reasons for that. One, we are reasonably confident that Nutmeg portfolios are sufficiently well managed (and re-balanced) to generate a good profit in the long run. Ans two, ISA is easily the most tax efficient investment instrument in the UK. You invest after tax income, true; in return you don’t pay capital gains or income tax when you draw down.

Finally…

So far, our experience shows that Nutmeg investing is well worth it. This is particularly appropriate for investors who don’t have the knowledge, competence and time to get into individual stocks investing or investors who want peace of mind.