Top tips for investment first-timers
IF YOU’RE lucky enough to find that you’ve got money left at the end of each month, the investment decisions you make now could make a big difference to the quality of the rest of your life. However, deciding how you invest isn’t easy. At a time of stock market volatility, negative real returns from savings accounts and the prospect of having to save up to £50,000 for a deposit to get on the housing ladder as a first time buyer, where should you start?
If you are considering investing your capital, it is important to pay off your debts first. There is no point earning 10 per cent on your investments (in a very good year), only to pay 20 per cent on your credit card debts, says Ben Smaje, managing director at Kennedy Black Wealth Management. Only once you’ve cleared your debts and built up an emergency fund of six months’ net income should you think about investing.
Once the debts are paid off, Scott Grant, director of lse.co.uk, advises that there are four key considerations to keep in mind: (i) a cash buffer, (ii) an investment timeframe, (iii) your attitude to risk and tolerance of investment loss, and (iv) the available (investment) tax wrappers. Appetite for risk will vary from one person to the next, so while some experts argue that the current economic climate favours a risk-embracing approach, how aggressive you chose to be hinges on your risk tolerance, your capacity to absorb loss and your investment timeframe, says Teresa Fritz, of MoneyVista. Younger people have a longer time horizon, meaning they can take higher risks as they have longer to ride out any negative market fluctuations. And investing is a long-term game.
For as long as mortgage deposits stay at minimum 10 per cent, some younger people will see saving for a property deposit as unachievable, and may invest their income in other markets until this situation changes, according to Oliver Barber, co-founder of Kingsbridge & Carter. Interest rates are at record lows and show no sign of rising. This outlook, combined with high inflation, means you may want to put your money into equities to try to engineer returns. However, if saving enough for a deposit is a possibility within two to three years, investing may not be the best approach. Jason Hollands of Bestinvest says “if your plan is to buy within the next three years then shop around for a higher rate savings account. Your first port-of-call should be a cash Individual Savings Account (Isa)”. But, if it’s retirement you’re planning for, the earlier you start investing, the greater chance you have of achieving your retirement income goals.
WATCH OUT FOR CHARGES
Some investors are shocked when they discover how much they are required to pay for product fees, fund managers, administrators, custodians, and the impact this has on their investment returns. Barber says this problem can be partially alleviated by buying direct assets such as land, property and commodities, as well as tracker funds and exchange traded funds (ETF).
Investment funds usually have an annual management charge (AMC), but more important is the total expense ratio (TER) – the annual rolling cost which takes account of all extraneous charges the fund bears. It could add in the region of 0.25 per cent to the AMC, according to Grant. As such, paying to receive expert advice to help guide you through the myriad of investment options can be money well spent. Far preferable, says Sarah Lord, managing director of Killik Chartered Financial Planners, than making expensive mistakes through lack of knowledge.
Be selective, shop around, read the small print, and the value of a well-chosen investment fund will hopefully offset their annual costs of 1.5-5 per cent and the impact of inflation.
EXPERTS’ ADVICE ON BUILDING AN IDEAL PORTFOLIO
■ “Keep things simple and adopt a long-term buy-and-hold approach. Avoid speculating, as this can be a costly mistress. Tempting and fun, but very expensive”.
Ben Smaje, Kennedy Black Wealth Management.
■ “An investment trust that invests in different asset classes (equities, bonds, and commodities in different geographic regions) is a good choice. The ‘holy grail’ of a portfolio is to give equity like returns with bond like volatility”.
Simon Fentham-Fletcher, Renaissance Asset Managers.
■ “Invest in well-diversified funds initially: this will give you balanced exposure and dampen the risks associated with investing”.
Sarah Lord, Killik Chartered Financial Planners.
■ “Cash Isas work well for those who want the certainty of capital. But, interest rates are at historical lows and over time the real value of cash is eroded by inflation: the silent assassin of your wealth”.
Jason Hollands, of Bestinvest.
■ “Asia and the emerging markets are growing at 4-7 per cent per annum, so it would make sense to have exposure to these areas of the world”.
Simon Fentham-Fletcher, Renaissance Asset Managers.