Beginner Investing Tips for Stocks and Shares ISA Returns
Even with interest rates expected to inch up next month, with slightly better than even money currently on the Bank of England increasing the base rate to 0.5% from 0.25%, they will still be
In that context, it is not surprising that Brits last year put £20 billion less into cash ISAs and £21 billion more into stocks and shares ISAs compared to the 2015/16 tax year. We can probably expect a similar trend this year. Many new holders of stocks and shares ISAs will inevitably be inexperienced investors with little background in risk-based investments such as company shares, funds and bonds.
If you’re new to a stocks and shares ISA, there are some simple rules that, if followed, will make the experience both less stressful and should also give you the best chance of achieving consistent, inflation-beating returns over the long-term.
Know Your Aims
The starting point of any investment is knowing what your aims are. Are you saving for a new kitchen, the deposit on a first home, investment property or retirement? The approach to investing and the kind of investments chosen will be influenced by the time frame of the investment. Because financial markets can be volatile and go through down periods, shorter term investments are normally more defensive and will usually include bonds, funds focused on bonds and less volatile shares such as utilities and health care.
Longer term investment portfolios with a timeline of ten years or more, where the holder can wait out market slumps, will usually be more aggressive and target higher returns, which usually come with a higher risk profile.
Invest as Much as You Can as Early as You Can
One of the most powerful influences on the long-term value of an investment portfolio is compounded returns. Compounded returns are based on any dividends earned from investments being reinvested in the portfolio. Over 20 or 30 years compounded returns build real value. For example, £250 invested every month for 25 years add an average annual return of 5% will grow to a value of around £147,000 when returns are compounded. However, investing £500 per month for 12.5 years will result in a final pot of only £98,500 – almost a third less.
The lesson is that starting to invest smaller sums earlier builds far more value than larger sums over less time even despite the actual value of the capital invested over the shorter period being the same.
Diversification of an investment portfolio is key. Studies demonstrate that spreading the risk over a good range of investment instruments results in either the same returns at a lower risk profile or higher returns at the same risk profile than less diversified portfolios. Even portfolios that start out small should be diversified as much as possible and not overly reliant upon the fortunes of a small handful of investments.
Like compounded returns, over the long-term, the level of fees paid by an investor for funds can have a significant impact on final value. Funds of a similar profile can have very different fee structures. One managed fund might charge an annual fee of 1.5% and another similar option 1%. Passive funds that track indices tend to have much lower fees, usually between 0.2% and 0.5%, and statistically few fund managers actually beat the market over the long-term. Over the course of 10, 15 or 20 years, a 1% difference in overall fees paid on an investment portfolio will make a significant impact on final value.
Take Qualified Advice
Inexperienced investors should seek out advice on how structuring their investment portfolio. If a trusted family member or friend has investment experience, then this can be a good source of information and advice but keep in mind that if not qualified, their advice may not be as good as they believe it is. There are also free government-backed resources such as the Money Advice Service website and plenty of other good online content on investing that is available for free. The danger here is that the inexperienced investor may not be able to distinguish between good and poor quality resources.
Investing in qualified advice from a good IFA (independent financial advisor) can often more than pay for itself over the years and can make sense for the inexperienced. It doesn’t have to be a regular expense and could even be a one-off to initially shape a portfolio. As with choosing any service provider, do some research before choosing an IFA to compare pricing and if possible get feedback from other clients or former clients.
And finally, perhaps the key element to successful long term investing through a stocks and shares ISA is not to panic if markets take a downturn. History shows that the cyclical nature of financial markets means that there will always be slumps. Some are more severe than others but history also demonstrates that financial markets have always bounced back from these slumps, almost always going on to higher levels than before. Of course, there is no guarantee that this will always be the case in the future but the evidence does suggest that in all likelihood an investment portfolio will recover well with time if a general market decline hits its value.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.