Investing Basics: First time investors
The growing army of new DIY investors has moved platforms to cater for those starting out – writes Holly Thomas
This year in particular has seen a huge leap in the number of first-time investors as a combination of lockdown and rock-bottom savings rates have pushed younger and perhaps less experienced savers to take the plunge.
Knowing how to get started is arguably the biggest barrier to investing. Interactive Investor, saw growth of over 100% in its ISA account openings in 2020 alone, offers its Quick Start portfolio to newcomers.
The funds aim to help aspiring investors get started with a ready-made global portfolio across a range of risk profiles, stock markets and asset classes.
Investors can choose from the six-strong range of one-stop-shop solutions, depending on their attitude to risk.
There are three Vanguard LifeStrategy funds invest in a set mix of shares and bonds. So, investors can choose a mix of 20% bonds and 80% equities or 40% bonds and 60% equities, depending upon appetite for risk. The funds have a low annual management charge of 0.22%. Run by computers, the portfolios are rebalanced daily.
The other three funds are from BMO’s Sustainable Universal MAP range.
The cautious fund is the lowest risk of the three, targeting a return of 2% above inflation over five years and can hold as little as 20% and as much as 60% in equities.
The Balanced version is the medium-risk option and targets a return of 3% above inflation over five years. The fund can hold between 30% and 70% in equities.
The Growth fund — the most adventurous — targets a return of 4% above inflation over five years and holds from 40% to 80% in equities. Newcomers don’t have to stick to this range – it’s there for a no hassle option.
Other platforms offer fund packs to help those with little experience to get invested. AJ Bell YouInvest offers a choice of funds whether you want growth, income or a mix of both.
There’s also a responsible growth fund which is focused on companies taking their commitment to the environment and society seriously.
Elsewhere, Hargreaves Lansdown offers a choice of six ready-made portfolios funds as part of its Portfolio+ service.
Digital wealth manager Nutmeg has seen new investors increase by a third this year, with an extra 25,000 signing up. Also known as a robo-adviser, Nutmeg places investors into a ready-made portfolio according to their goals and attitude to risk.
There are ten fully managed portfolios or five unmanaged ones – run by algorithms, and charges are up to 1% or 0.68% respectively. (See the full list of robos on our site here and run the robo calculator here).
Nutmeg recently launched five new ‘risk-rated’ multi-asset portfolios — the Smart Alpha range – run by managers at JP Morgan Asset Management.
They contain between 10 to 14 passive and active exchange-traded funds where managers will take ESG factors into account when deciding which funds to pick. The management fee is 0.75% for funds up to £100,000, falling to 0.35% above that. The average underlying fund cost is 0.19%.
Help is at hand for DIY selection
There’s plenty of help at hand from platforms if you want to go down the DIY route of picking your own funds. And with over 3,000 funds to choose from and an ever-changing economic backdrop, even seasoned investors need guidance on where to place their long-term savings (find the right platform here).
One of the most useful tools is the shortlists of funds which offer a range of funds listed for strong management and performance. Elsewhere, the fund’s factsheet is where you can read about a fund’s overall objective, the 10 companies in which it invests most of its money and how it has performed over the last few months and years. It will also show the costs of holding that fund.
Individual fund companies also publish regular updates on funds and the overall economy. If you can make the time, there’s plenty of information around that can help with your decision.
Five do’s and don’ts for first-time investing
1. Don’t invest in anything you don’t understand
It’s crucial that you take the time to get your head around exactly what your money is invested in and the level of risk involved. If you don’t understand, steer clear.
2. Do diversify
Investing internationally across a wide range of companies and currencies should cushion your money from stock market shocks.
3. Don’t follow the herd
Hearing about big gains friends have made could tempt you to pile in. Investing in sectors or companies that have seen share prices rise quickly means you’re buying when the price is already very high. Do your own research about how you think you can grow your money.
4. Do invest regularly
Investing monthly into your chosen funds will help you smooth out the highs and lows in share prices. When they go up, the value of your stocks rise – and when they go down, your next contribution buys more.
5. Don’t buy an investment that promises generous returns ‘risk-free’
Such a promise should ring alarm bells. Be wary of companies which call or email out of blue and put you under pressure to part with your money.
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