Ready To Start Investing For The Future? A Beginners Guide To A First Portfolio
With interest rates firmly anchored to the bottom and with no sign of any imminent change to that now decade-long status quo, it’s no surprise that investing online in funds, shares and bonds is increasingly popular. There simply aren’t many obvious alternatives for anyone who doesn’t want to see their savings eroded by cash interest rates running below inflation. Especially for those who understandably don’t want to take on the risk and commitment of other kinds of investment that require either a hands-on approach, greater experience and expertise and usually represent the kind of risk level unsuited to smaller private investors.
The chart above clearly shows the increase in the amount of cash invested into stocks and shares ISAs from 2014/15 onwards – presumably the point when more savers gave up hope for a significant rise interest rates in the foreseeable future. Last year saw another jump in the amount of money going into stocks and shares ISAs, while cash contributions notably fell.
The good news is a lot of specialist knowledge is not necessary to start a first investment portfolio. A significant lump sum of cash is also not a requirement. By sticking to a few simple rules, anyone can invest in a well-balanced, long term investment portfolio without exposing their savings to unnecessary risk.
Isn’t The Stock Market Risky? Could I Lose My Savings?
The first question to ask before starting a first investment portfolio is the general one of whether the stock market is right for you at this moment in time. Other than worries that it will take too much time or specialist knowledge, the number one reason why savers are put off from investing in the stock market is that they are worried a stock market crash could see them lose money.
Is that a genuine worry you should have? The honest answer is that stock markets do have down periods that can see investment portfolios lose significant value. Historically, financial markets including the stock market have always, like the wider economy, been cyclical. They are subject to down periods and the occasional ‘crash’ that sees a sudden loss of value. The most recent stock market crash between 2007 and 2009 was particularly bad and saw the FTSE All-Share index that represents all of the companies listed on the London stock exchange lose over 45% of its value.
That of course represents a devastating blow to any investment portfolio. With these ‘crashes’ taking place with consistency, even if the length of the periods between them are unpredictable, and it being close to guaranteed we have not seen the last one, why on earth would anyone risk their savings on the stock market?
The chart above shows why. While stock market crashes of varying degrees of severity are something to be relied upon as an investor, a recovery subsequently taking hold and markets returning to their previous level before moving on to new highs has proven to be just as reliable a part of the cycle. So even if short-term losses are inevitable at junctures of an investment portfolio’s lifetime, a well-diversified portfolio would also, based on historical evidence, should also deliver consistent returns over the long term.
That’s why investors approaching retirement tend to start to gradually move part of their money out of the stock market and into cash and bonds. If some investments will have to be cashed in within a few years, a portfolio might not have time to recover from a stock market slump so it is better to reallocate a few years of funds into low-risk bonds and cash so they won’t have to be sold at a loss.
But for investors that still have years to go before investments will have to be cashed in, stock market crashes can actually be viewed very positively. They allow investors to buy the same investments as before at a much lower price and then benefit from the gains when the market recovers. Pre-crash investments should recover their value with time and new investments bought while the market was down have a very good chance of delivering great returns over the next few years.
When Is The Time Right To Start Investing In The Stock Market?
If there is one golden guideline when it comes to investing in the stock market it is not to try to ‘time’ the market and buy and sell when you think, or hear, it is due to rise or fall. Even the most successful professional investors in the world don’t manage to get that timing right with any consistency. As we’ve already seen, if you have a long term investment horizon of 10 years or more, it shouldn’t matter when you start investing. The important thing is to start and then to do so consistently ignoring the ‘noise’ and temporary cycles.
Once you start to approach retirement, or whenever else you have decided is the time to start drawing cash down from your portfolio’s value, you should start to change tactics. But until then it should just be a case of doing what you have been doing and putting whatever you can afford into your portfolio each month.
However, there are circumstances in which now might not be the right time for you to start an investment portfolio. Financial advisors recommend that before directing cash towards an investment portfolio it is wise to first pay off any high-interest debt such as credit card balances. Saving up a cash buffer of three to six months living expenses is also advised. That will prevent you from being forced into cashing in investments at an inopportune moment in the markets if you should unexpectedly lose your source of income, such as through being made redundant.
Getting Started As A Stock Market Investor
If you have reached the point of deciding the time has come to begin investing for the future, where do you start? The first thing you will have to do is open a stock and shares ISA or SIPP. You don’t have to invest through an ISA or SIPP but with some attractive tax breaks achieved through those wrappers it makes little sense not to. The annual ISA allowance is £20,000 and SIPP allowance £40,000. Because investments into a SIPP come with a government top-up which basically equates to your income tax on those contributions being returned to you, there are some restrictions such as not being able to access value held there before you turn 55. If you want more flexibility than that, invest into an ISA. This shelters your investments from any capital gains or additional income tax on returns but allows you to make withdrawals whenever you want.
If you are lucky enough to use up both your ISA and SIPP allowances over a year (unused SIPP allowance can be backdated by up to 3 years) you can then make any additional investments through a standard stockbroking account. Make sure you compare fees when choosing a stocks and shares ISA or SIPP provider as they can vary quite significantly.
What To Invest In?
Beginner investors are usually advised to start with regular investments into a low-cost tracker fund, or 2-3 different low-cost trackers covering different markets such as the UK, USA and Europe. Tracker funds, as the name suggests, track an index such as the FTSE 100 or FTSE all-share. That means you are not risking your investment success on the fortunes of an single company, or a small number of companies. Rather, you are investing in a broad selection of companies.
In the case of a FTSE 100 tracker that means the 100 largest companies by value on the London Stock Exchange. A FTSE All-Share tracker means the investment reflects the entire London Stock Exchange. Trackers covering US, European, Asian or Emerging Markets take the same approach. Investing in trackers that reflect global markets is also a good idea as it means your investments will probably succeed if the global economy continues to grow, which has been the tendency over the last decades.
A classic first investment portfolio would be 70%-80% of regular investments made into an index tracking the developed stock markets of the world, like the MSCI World index, and 20% or 30% being invested into an Emerging Markets index. The latter is slightly riskier and tends to be more volatile in the short-term but in the long term offers the promise of higher returns.
Another option, though slightly more expensive, is to invest through a ‘robo-advisor’ such as Nutmeg or Wealthify. These platforms make you complete a questionnaire to understand your profile as an investor and risk appetite. They then recommend a diversified fund designed to reflect your personal situation and investment goals.
So there you go. Getting started investing is really not that complicated. And as long as you steer clear of trying to pick individual stocks or time the market, with a long term horizon of over 10 years, it really shouldn’t be too risky either.
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.