A lot of people who really should be investing are not because the fund management industry is still struggling to explain the basics in a clear and accessible way. Last week I had a chat with Richard Stone, chief executive of online stockbroker the Share Centre. We both agreed that more plain speaking is needed to convince people that investing is important, and doesn’t have to be boring, scary, or complicated. So Richard has kindly put together 10 jargon-free tips to help you if you want to invest but you don’t know where to start:
- Investing is risky, so keep an element of savings in cash for a rainy day.
- When investing, do so for the long term.
- A little and often is a really good way to save and invest – many firms offer reduced dealing costs if you invest a little bit each month.
- Decide whether you are investing to try and achieve a level of income or capital growth – or a mixture of the two – and how much risk you are willing to take. How much of what you invest could you afford to lose?
- Do some research – look around the market and find a provider you think suits your investment needs.
- If you’re new to investing or don’t have time for copious amounts of research, don’t try and pick the next winning market or stock – you may get it right, but you might not. It is better when starting out to find some general funds which give you exposure to the market as a whole. Some firms have lists of preferred funds where experts have selected funds they think are the best of their type – this may help you make those first investment choices. Some firms also have ‘model portfolios’ or pre-selected baskets of funds which reflect different levels of risk and can provide a good starting point.
- Make sure you understand what you are going to be charged and for what. Make sure you look at all the extra charges – e.g. for withdrawing cash or transferring out – not just at the headline rates for the account.
- Some providers charge value related fees – i.e. a percentage of the value of your account each month – others charge flat fees. The one that is best for you will often depend on how much you are planning to invest over time and how frequently you think you will trade. It can be complicated, but charges can make a big difference to the value of your investments so it is important to work out what is best for you.
- As a new investor, look for service providers that have good customer service – this is always difficult to judge so look out for awards won or customer reviews on sites like Trustpilot. You may need some help so it’s important that the service provider you choose is there for you when do.
- Try to invest as tax efficiently as possible – always use an ISA first, particularly for investments now the government has made the first £1,000 of interest income on cash tax free anyway. Even if you don’t have the full £15,240 annual allowance to invest, you should still use an ISA account first as all income and capital gains are tax free within an ISA.
Wait, what’s an ISA?
It stands for Individual Savings Account – it’s just a savings account with a little fence around it which protects the interest you make on your investments from the tax man as long as you have less than the £15,240 limit. That’s it. Your money is not stuck, you can move it in and out as you wish. The other version of it is a Cash ISA, which just works like a normal savings account, although you may get a better rate if you lock your money away for a certain period. As mentioned above, you can choose a ready made Stocks & Shares ISAs or you can choose your own funds or stocks in which to invest.
A ready made ISA or any other kind of pre-selected model portfolio is like buying an ‘off the peg’ outfit instead of designing your own (a self-managed portfolio) or getting a designer to make you a one-off piece of couture (a more expensive bespoke portfolio built just for you by a wealth manager). The minimum investment in a ready made ISA varies by provider, but it is often £10, £25 or £50 a month or a lump sum of at least £100.
What’s the difference between the many providers that offer them?
Generally, what it boils down to is cost and choice. Bigger providers will offer you more choice, maybe with lower charges because of economies of scale, but you might not get the same level of customer service as at a smaller firm (it’s the difference between shopping at your local greengrocers versus going to Asda).
Ok, this is when you need to geek out a little bit and do some reading – there are loads of investing magazines and websites aimed at consumers which can give you great information. Do you care where your money goes? Now is your chance to support those companies making the world a better place. Or maybe you should start by investing in your home market – most people will be familiar with the household brands that make up the FTSE 100 (an index made up of the 100 biggest London-listed companies). A large-cap UK equity fund invests in these stocks. You could choose a global fund which can invest anywhere around the world, you could buy a bond fund which works by loaning money to companies to help them grow, you could back a particular market such as the US or China, or a specific sector such as tech. There is literally a fund for everything. But I would start simply and pick something you understand. The Share Centre’s Richard Stone says:
“Investing should be fun. Enjoy it. If you’re not sure of where to start, invest in businesses you know and think are doing well. For example, you may have a view on the latest Apple products or Marks & Spencer ranges and how well they are selling and being received amongst your friends and family – that may itself be a pointer to how well those companies will do in future.”
I’ll do a lot more fund and stock selection stuff as the blog develops which might help you. But for now, the point is you don’t need to be scared of investing, it’s really not that hard. And you can start off with as little as £10 a month, which is less than the cost of a cocktail in a central London bar. Can you really afford not to?