With over 30years experience in Financial Services David (DAN) Norman has worked for 10 different firms, most recently the CEO Credit Suisse Asset Management (UK) he founded the specialist multi asset passive boutique, TCF Investment, in 2009. Here he gives his thoughts on the best long term strategy for your ISA.



Investing is like any other long term activity – it needs a clear destination or purpose (to make sure you can monitor your progress), you need to understand the risks that might be faced along the way (and what you might need to do to reduce or to respond response to those risks) and it needs some determination to stay the distance.

A clear plan of what resources you will needed for later life is critical – as the famous conversation in Lewis Carroll’s “Alice’s Adventures In Wonderland’ highlights:




“Would you tell me, please, which way I ought to go from here?”
“That depends a good deal on where you want to get to,” said the Cat.

Spending some time to develop this plan is probably the most important stage in investing. Without a plan how will you know whether you are on track? This is an area where a good financial adviser can really help. And any plan will of course need to understand the risks.


The Risks


There are some obvious and less obvious risks that all investors face. Chief among them are inflation, volatility (the ups and downs) and cost – though I would argue that costs are more of a certainty than a risk.

Every investment has a different risk profile. Cash isn’t volatile but it is poor at beating inflation. Equities beat inflation in the long run but are more volatile in the short run.

Understanding your own risk profile is critical as it is the only way to build a portfolio that will meet your long term goals – you need to know:


  • Your attitude to risk (your appetite for risk if you like)
  • Your need for risk (how much return do you need to meet your goals?)
  • Your risk tolerance (can you afford short term losses in pursuit of longer term goals?)


Many investors underestimate the impact of inflation or as Neil Rossiter (Certified Financial Planner) describes it “the hidden tax”. Many people aged 60 today will live into their 80s and beyond. To keep pace with inflation at just 2.5% pa your investments need to grow by 85% over a 25 year period. Your investment plan needs to take account of this.


Eggs, Baskets and Omelettes


Diversification, the idea that spreading your investment between different asset classes and between different stocks within each asset class, can boost your returns has been around for many years, but is as valid today as it ever was.

Often described as a ‘free lunch’, you can boost your returns and reduce your risk by diversifying and rebalancing regularly (bringing your portfolio back into line with its long term asset allocation). As a rule of thumb more often than annually and less often than quarterly is a good guide – the costs of rebalancing being a key factor.




Spreading your investment between assets classes (equities, bonds, property, cash, commodities) leads to a lower risk profile. The same goes for spreading investments within asset classes between different geographies (e.g. UK and Overseas) and sectors (e.g. energy, financial and retail company shares).

Index funds are an excellent way to achieve this diversification at very low cost – they hold a very broad mix of bonds or shares. And rebalance very efficiently.

The latest generation of low cost multi-asset funds also offer diversification across asset classes and can be very cost effective.


Cost – Beware the Cost Monsters


One of the biggest risks that long term investors face is cost – and yet too few see cost as a risk at all.




Every pound that is taken from your investment in costs or charges is lost forever. And so is the return on that pound …each and every year in future.

Unfortunately the investment industry isn’t always as good at showing the full costs as it might be. Always look for the Total Expense Ratio (TER) or Ongoing Charges Figure (OCF) of a fund, rather than just the Annual Management Charge (AMC).

Also check out the Portfolio Turnover Rate (PTR) to see how often the manager is trading the stocks and shares inside a fund – and thus how much extra cost drag the manager is generating from the trading. Another good reason for choosing index funds is that they trade far less often – so have lower running costs as well as lower expenses.

Morningstar in the US conducted some analysis in 2010 to identify the best historic predictors of performance. The results are remarkably clear:

“In every time period and every data point tested, low cost funds beat high costs”

“Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile (cheapest fifth) produced higher total returns than the most expensive quintile (most expensive fifth)”

Choosing low cost index funds gives you a head start when building your portfolio. And the same goes for the cost of any wrappers (ISA or pension) that you select. Make sure you know the initial costs, the running costs, the switch or trading cost and any other charges.

If you are choosing active funds make sure the manager has the right benchmark for your needs (comparing their performance to an index rather than the sector for example). And if you can try to assess the risk adjusted return – any manager can take more risk but do you get extra return for the risk taken?


In the Long run Returns


Real assets (e.g. equities / property) have historically outperformed cash and bonds over the long run. A key point is that asset allocation, how much you invest in bonds vs. equities for example, has been shown to be by far the biggest driver of long term returns and is far more important than which equity you are invested in.

Using index funds to get access to a range of asset classes is a sound strategy. Perhaps adding some specialist active satellites to spice up returns in smaller areas (small companies, commodities

Academic research into the performance track records of active funds bolsters the case for passive investing. An analysis of past performance figures concludes that, although some active investors possess skill (or luck), the average fund typically underperforms the market.

Even the most skilful investors struggle to produce consistent outperformance. And the time, effort and therefore cost that would be required to select these managers (in advance if any hoped for outperformance) is probably greater than the extra return anyway!


Investing is not an art – it is a Science


Investing needs a clear long term objective based on understanding the risk and returns you are seeking. Then you need to use the key rules of investing to help you achieve your goals:


  • Get the right mix of assets to meet your needs
  • Rebalance (keep your asset mix on track by checking it as the environment changes)
  • Keep costs low
  • Save tax where you can – using your ISA allowance will build up a tax exempt pot for the future


Index or passive funds are an excellent low cost way to achieve very broad diversification within an asset class at low cost. Combining index funds into a portfolio tailored to meet your needs – by using perhaps 10 or so index funds or simple ETFs – is a great way to invest for the long term. And stands more chance of making you, rather than the fund manager rich!

My investments? All invested in a diverse portfolio of index funds and ETFs….my money is where my mouth is!

David Norman
TCF Investment

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