How to choose the right investment for you
1. So you want to invest. Hold your horses! Do you have three to six months of salary as a cash cushion? No – then go save. If you do, progress to the next point!
2. The easiest way to invest is online. Hargreaves Lansdown operates the largest ‘platform’ for DIY fund investors. Its rivals include Fidelity, Bestinvest, Charles Stanley Direct and AJ Bell. You’ll pay between 0.25% and 0.5% of your investment just to use the platform. It varies depending on how much money you invest. Cheapest is not always best: you might want to pay more for better service.
3. Now decide how much you’re going to invest. Is it a lump sum or is it a regular saving? You don’t need megabucks to start: some platforms allow small contributions of £25 a month.
4. Your money will ultimately buy shares (sometimes called units) in a pooled fund of your own and other people’s money. Together you’ll pay a small amount to a fund manager to invest the cash in the shares (or other investments) they consider will make the best return.
5. There are thousands of funds, so which should you choose? First think about what you want the money to do. Do you want it to grow in size or do you want to take the interest it makes, perhaps to live on? If it’s the former, you’ll be looking for accumulation shares in a growth fund. If it’s the latter, you’ll be looking for income shares, sometimes, but not always, in an income fund.
6. Investments go down as well as up in price. Some areas are more prone to going the wrong way than others: large companies are more stable than small ones, developed markets (eg UK and US) are less rocky than emerging markets (eg Asia). If you want less of a rollercoaster ride, stay in the less risky sectors.
7. It is best for beginners to start off in their home market (no foreign currency issues). For Brits then, that’s the UK. Your choice is between a tracker fund, cheap at 0.1% or less a year and run by computer, or a human-managed fund costs around 0.75%. (See the SMM guide to trackers here.) The return from the tracker will stay close to that of the stock market index it follows. In contrast, the human manager could do better than the overall market, or sometimes worse. Many investors therefore put most of their money in a ‘core’ tracker and any extra in the ‘satellite’ human-run fund.
8. By now you should be down to a short list. You could do hours of research on ‘past performance’ – how funds have done in the past – and different fund managers’ styles. Or you could short-cut the process by selecting your fund from the list of recommendations provided by most platforms. These aren’t totally impartial but tend to reflect the best fund managers out there.
9. Having chosen your fund, you’ll be asked which share class you want to buy: X, A, B, R or I? This alphabet soup is linked to the different charges on each share class and isn’t standardised. Choose the cheapest or ‘clean’ share class. If in doubt, there’s no shame in ringing the helpline.
10. Finally, if you haven’t used up your Individual Savings Account (Isa) allowance in the relevant tax year, make sure your investment is in its Isa wrapper. It has tax perks which essentially mean any gains or income from your money are tax-free.
- More on fund platforms and prices at http://www.comparefundplatforms.com/.
- See past fund performance at www.trustnet.com.
- The annual Isa allowance is shown at https://www.gov.uk/individual-savings-accounts/overview.
Last updated 22 August 2017