Investing can be a daunting business. Fear of the unknown leads savers to choose cash over stocks and bonds, but cash is an asset that does not reward loyalty. While the stock market may represent danger to many, BlackRock’s Investor Pulse Survey reveals that inflation eroded £760 million of Briton’s cash savings in the first half of the year.
Inflation compounded over 20 years would see the £2,270 pot that Brits have set aside for long-term savings worn down by £870 – a total of £20 billion for the total UK population. But that £2,270 invested in the FTSE All Share over the last 20 years, would be worth £8,350 today. Investing is by no means fool proof and the value of your investments can go down as well as up. But with a bit of know-how and patience it can be considerably more rewarding than sticking money in a high street savings account.
Follow our checklist to make sure your first forays are a success.
Only Invest What You Can Afford to Spare
The value of your investment can go down as well as up – you can lose capital. But you can also make considerable returns from savvy investments. What you do not want to do is be forced to sell an investment when it has suffered a dip in value, crystallising your losses. Do not treat your investments like a cash machine, avoid withdrawing money before you hit your financial goals at all costs.
Therefore, only invest what you can afford to spare for some time. While cash savings rates are paltry, if you have a short-term financial goal you are best keeping those savings in cash. Keep a cash buffer or emergency fund for unexpected bills too. The experts recommend between one and three months’ salary.
Invest in the Best
Stock picking is a difficult thing to get right – even the professionals sometimes fail to spot a company in trouble. Over the past decade several good-looking stocks have come-a-cropper and seen their share prices’ plummet; BP following the oil spill disaster, financial stocks following the global recession and Tesco after its accounting scandal.
Because of this, beginner investors are best off choosing composite funds, where a professional picks between 30-150 companies on behalf of the end investor. Of course, like any industry not all fund managers are great at their jobs. In fact, as many as 90% of funds fail to beat their benchmark. But Morningstar analysts can help – they award medal ratings of Gold, Silver and Bronze to the best in class, helping investors make informed decisions before choosing a fund to invest in.
Diversify Your Holdings
This does not mean you should simply buy up all the Gold Rated funds. Asset allocation is key to investing success. Funds must be chosen for three reasons; a conviction in the particular style or region, a good fund manager and whether it fits into your portfolio. For example, if you think China stocks provide compelling growth opportunity, pick a highly rated China fund to invest in. Balance this investment with an uncorrelated asset – such as a fund which has exposure to a developed market, or to fixed income market.
If asset allocation seems too tricky, outsource the task of blending complimentary investments to a fund-of-funds or multi-asset manager such as those run by Jupiter, Schroders or F&C.
Drip Feed Your Investments
Market timing is almost impossible to get right. How many headlines have you read spelling the end of the US stock market rally – and yet, it seems to continue to climb ever higher. When should you take profits? Equally, when a market loses value – especially a sizable slump, it takes nerves of steel to part with your cash on the off chance you’re picking up a bargain.
Instead, drip feed your investments through an investment platform. You can set up a monthly contribution from as little as £25. Investment is automated to override the fear factor. "Drip-feeding an investment means you have a better chance of growth," says Mark Dampier of Hargreaves Lansdown. "It's difficult not to panic when your investment loses value – which it invariably does at some point – but if you buy more units when they're cheap, you reap the benefits as the investment grows."
Use Tax Efficient Wrappers
By putting money into an ISA it is possible to shelter various kinds of investment from the need to make capital gains tax (CGT) or income tax payments.
Any investments made within the ISA are, subject to various annual allowances, tax free. For example, an investor who wanted to put money into assets that paid out income in the form of dividends or interest could quite legally avoid income tax. Any investments made within the ISA wrapper would not need to be declared to the taxman.
Similarly, investors workplace and personal pension schemes are tax-efficient, and the less you pay the taxman from your investment income and profit, the bigger your portfolio will grow.
Be Patient
No individual market, stock or fund only climbs ever higher; every investor is destined to suffer losses over certain parts of the cycle, even professionals. But with a bit of patience you may find that over the long term these periodical losses are forgotten as the value of your investments are greater than your initial capital. Be patient and you may well be rewarded.
