Nutmeg: An alternative way to invest your ISA
If you want to invest, but you don’t have the time or inclination to do it yourself, a website called Nutmeg might be the answer.
Over the years, I’ve often said that you are the best person to make your financial decisions. If you make your own decisions, you know that your affairs are being managed by someone you can trust – you.
But I accept that many folk don’t want to follow that approach. They feel that they don’t have the time or the knowledge to make the right decisions and I can understand that. Many are particularly wary when it comes to investing – especially investing in individual shares.
That’s where stockbrokers come in. Many investors go for an advisory service, where the broker gives you suggestions for what to buy and sell, but you make the final decision. Alternatively, you can go for a discretionary service where the broker makes all the decisions for you. Sometimes these discretionary services are offered by posh private banks such as Coutts.
The problem with both kinds of service is that the costs tend to be high and you also normally need a fair amount of money to start with. Indeed some of the more upmarket discretionary services aren’t interested unless you have at least a million pounds available to invest.
Nutmeg
Nutmeg is very different. You only need to have £1,000 to invest, but you will still get a discretionary investment service. You won’t have to decide where to invest your money, you won’t get advice; it will all be done for you.
Nick Hungerford, the CEO of Nutmeg, told me that his business makes investment decisions on the basis of your profile on the site. So you tell Nutmeg about your attitude to risk and how long you’re investing for, and Nutmeg then invests your money for you.
You can set up individual pots for different purposes. So you might have one pot for your retirement, another for school fees and another for a trip round the world that you’re planning for 2018. You can set different risk levels for each pot – so you might be willing to take greater risk with your retirement pot if you’re not planning to retire for another 30 years.
As Nutmeg is aimed at people who don’t have massive wealth, you won’t be surprised to learn that you can place your Nutmeg investments in a Stocks & Shares ISA wrapper.
How is your money invested?
Nutmeg invests your money in a range of shares, commodities and bonds. Much of this investing will be done via exchange traded funds (ETFs) which are basically a cheap way to invest in a particular asset class. So you could buy an ETF that is invested in London’s FTSE 100 index, or an ETF that is invested in physical gold.
ETFs are similar to index tracker funds and are normally a good way to invest. That’s as long as the ETF is invested in a conventional asset such as a company shares or a particular commodity.
Some ETFs have come unstuck by using more high-risk investment techniques that don’t really need to concern us here. The important point is that Nutmeg only puts money in ‘sensible’ ETFs that invest in conventional investment assets.
Nutmeg has a team of investment experts who will make the investment decisions – these will then be applied to your portfolio depending on your profile. You can create a dummy portfolio on the Nutmeg site to see how it works – you don’t have to invest any cash.
Transparency
Hungerford also emphasised another plus to me. Nutmeg customers get transparency. Although they don’t make the investment decisions, they can easily check where their money is invested and how their investments are doing.
Charges
The charges are also a lot lower than a normal discretionary service. For a high-end service, you could end up paying 3% a year in charges – that’s 1.5% for the discretionary investment manager, and 1.5% for the funds that you’re invested in.
If you have a large investment pot, and you invest with Nutmeg, your total charges could be as low as 0.5% a year. But if your pot is closer to £5,000 than £5 million, Nutmeg will charge you 0.9% a year. You’ll then pay another 0.25% for the underlying investments – so that will work out at around 1.15% a year. Not bad, but there are cheaper ways to invest in the stock market....
Verdict
If you’re determined to invest in the stock market at the lowest cost, your best bet is to invest in a cheap index tracker fund via one of the low-cost investment platforms. The cost could be less than 0.5% a year. You can read more about this approach in The UK’s best Stocks & Shares ISAs.
But Hungerford firmly believes that Nutmeg’s more sophisticated investment approach will deliver better returns for investors. It’s not just that the returns may be better than an index tracker, but also that your money will be invested appropriately for you.
So if you don’t want to take too much risk, a fair bit of your money will probably go in bonds. But if you want to take a high-risk approach, more will be invested in shares and commodities. Nutmeg’s investment committees will also adjust your investments as global conditions and your circumstances change.
Trouble is, Nutmeg was only launched last year and it’s far too early to see whether its investment approach really does deliver decent returns. So personally, I won’t be investing any of my money there, but I can see that it could appeal to people who really don’t want to make their own decisions.
More on investing and ISAs:
Wake up your wealth: a digital financial adviser
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