3 lessons I learned working at a fund manager
Powerful lessons from successful investors.
I grew up in an environment where I didn’t have exposure to investing. It simply wasn’t 'a topic of conversation in my house or something discussed by my friends or their families. It wasn’t until university when I was fist exposed to capital markets. After graduating I had a crash course in markets with my first job at a financial advisory firm. I realized very quickly that as important as estate planning and tax were, I was drawn to investing. The strategies, structuring of portfolios and the theory was great. More importantly, how investing could transform lives within a generation.
I moved to a fund manager and my first job there was with Client Services. I was thrown in the deep end and had to learn about investments, superannuation and pension accounts – the products, the legislation and regulations, and most importantly, how to make it all make sense for investors. That last part was the trickiest. My job provided the opportunity to speak to hundreds of investors every week and see a snapshot into their investing history and how they had grown their wealth over time. I got to hear a lot of perspectives on investing - from clients to financial advisers, to fund managers. These are my three favourite lessons I learned.
Dividends can change your life
I received a call from a client who had been invested in an Australian share fund for 35 years. I could hear the agitation in his voice. He had retired and taking stock of his financial situation and realized for 35 years he had barely made any gains through this fund. Speaking to me was not soothing his agitation. He wanted to speak directly to the fund managers – and fair enough. 35 years is a long time to be invested in a fund. It’s a long time to place your trust in the investment professionals at the helm of the fund. I imagine at this point, the client was questioning what he received for a lifetime of fees.
It didn’t take long for me to find why this client’s account had not ticked up in three and a half decades. He had received 1 million dollars in dividends as cash. It is an astonishing amount to receive as passive income, especially without realizing it.
Even more astonishing is what would’ve happened if he had reinvested those dividends. He would have had almost $2.4m more in his account which certainly would have changed his performance and his perspective.
As eye-watering as that difference is, investing isn’t just for the sake of watching your account increase in value. I can also think of how markedly different my life would be with an extra $2,375 a month for 35 years which is what $1m in dividends would have represented over that time period.
Investing is not a competition about who ends up with the largest number in their account. It is a vehicle for investors to reach their financial goals and create better lives for themselves. It can be used to support the lifestyle that each of us want.
Invest early and consistently
I worked at a fund manager that had been around for decades –this meant I got to see the merits of investing early and consistently over long time horizons. There has been an influx of retail investors in the last few years which is an extremely positive trend. The traditional perspective that investing is only for the wealthy has been thrown out the door with the introduction of low-cost brokerage platforms, more accessible investment education and data. I was lucky enough to grasp that investing was for everyone before this revolution. I saw client accounts that had achievable minimum investments, and the ability to make small investments frequently - palatable even on a graduate salary. Looking at client account histories I could see that large account balances were the result of years of small investments. Before this realisation these account balances seemed completely unattainable for me.
Seeing this historical record of small, achievable contributions over time in client accounts made me realise that I wasn’t appreciative of one of the most powerful variables in investing - time. Time is a huge influence in your ability to reach your goals. I hear from a lot of friends and listeners of Investing Compass that are looking to invest but haven’t because they are waiting for the right time.
There have been countless studies done, including by Morningstar, that timing the market does not work. The key to successful outcomes is time in the market – the duration of time spent with your money invested. People are naturally scared of losing money – and that’s completely reasonable. You’ve earned it and you’ve worked hard to save. But the risk of not investing and not achieving your goals is a much more significant risk.
One of the best illustrations I have seen that show the power of time combined with compounding is the following:
The scenario goes through the monthly savings needed to accumulate $1 million by 65. The green on the second graph shows capital, and the orange shows growth. The earlier you start, the more of the hard work that is taken off your plate.
How to read a Product Disclosure Statement
Product Disclosure Statements (PDS) are not exactly riveting reads, but they are a beacon of truth in an overly complex landscape. A PDS must disclose all fees, the fund mandates (what they can and can’t invest in), and the purpose and aim of the vehicle (e.g. beating a benchmark, or achieving a certain return above CPI).
Learning how to read a PDS enabled me to simplify my investing experience in a couple of ways. The first was realizing that there’s a lot of marketing involved with investment products and the name of the fund doesn’t always reflect the underlying investments. When I first started investing, I invested in several funds with sexy names that promised to generate alpha and touted their diversification. In reality, they were pretty much all Aussie large cap equity funds in lipstick.
A good example of this is Vanguard International Shares ETF (ASX: VGS) . By the name, you’d expect broad international exposure. What you’re getting is a 70% allocation to the US. The next four largest country exposures of Japan, the UK, Canada and Switzerland have a close to 20% allocation which leaves around 10% of the ETF invested in the other 46 countries. This of course isn’t Vanguard’s fault because they are following an index, but it is important to understand the composition of indexes.
Through a PDS, you’re also able to see a holistic view of what fees I would be charged. PDSs must show an example of all fees you will be charged in a fund. I find this much simpler than searching for each type of fee on a website and doing the math myself. Fees can have an extremely detrimental impact on total return outcomes. Know exactly what you’re getting yourself into by seeing the full picture.
As important as all of these lessons were, the most important lesson I learned was why it was so important to invest. I count my blessings that I learned this lesson in my early twenties where I can harness the transformative power of investing over time. Understanding how powerful this is means that I am more than likely to have a comfortable retirement. It means I can achieve personal goals such as travelling and further education. It means I can be financially independent.