Millennials who are thinking about starting a portfolio should follow this four-step action plan
The most common question Times Money hears from millennial readers is “how can I start investing?” It’s daunting, but getting started young will help to make the most of your savings — here’s what new investors should consider.
Step 1 Should you be investing?
Investing in the stock market means putting your cash into company shares, which should rise in value over time, so you could end up with more money than from interest on a savings account.
“For anyone who is unsure about the benefits of investing in stocks and shares, our calculations show how staying in cash would have severely stunted your Isa savings. While shares are more risky than cash, over the long run they have significantly outperformed,” says Maike Currie, a director at Fidelity International.
Yet investing is not always the best use of your money. It is a good idea to have three to six months of expenditure in cash as a safety net. Tony Welby, the director at Saunderson House, a wealth manager, says for those who have managed to get on to the property ladder may be better-off making overpayments on their mortgage. “It is risk-free,” he says. “If you have no idea about investing and do not want to take any risk, perhaps you should pay down your mortgage.”
Step 2 Decide what you are investing for
When putting money in the stock market, financial advisers suggest leaving it there for at least five years to have the best chance of it appreciating. So, if you are hoping to buy a house in two years’ time, investing your deposit money now is risky. “Anything less than two or three years means you can be hit by a downturn in investment markets and be forced to sell. The longer your horizon the better,” says Mr Welby.
The two simplest ways to start investing are through an Isa or a self-invested personal pension (Sipp). You can sign up for them through many banks or investment companies such as Hargreaves Lansdown, Bestinvest or Fidelity Personal Investing. You will get an online account where you can buy different investments.
The benefit of Isas is that if you need the money back you can sell your investments and take the cash out. The advantage of a Sipp is that any money you put into it will be topped up by the government with an extra 20 per cent if you pay the basic rate of income tax, or 40 per cent if you are a higher-rate taxpayer.
If are investing in funds yourself, diversification is crucial
“That cannot be underestimated,” says Adrian Lowcock, the investment director at Architas. The drawback is that you cannot take money out of a Sipp until you are 55.
If you have a workplace pension, remember that your employer may increase their contributions if you increase yours. It may make more sense to put more into your workplace scheme rather than invest in an extra pension on the side.
Step 3 Go it alone or use a professional?
“If you do not mind the risk you may be prepared to take a punt yourself,” says Mr Welby. A financial adviser or wealth manager will invest your money for you, and charge a fee. It’s safer, but many will have a minimum investment, typically £20,000 to £50,000. Look at websites such as Unbiased to find advisers in your area.
If you have a small amount of money to invest and are not confident about doing it yourself, Mr Welby suggests seeing a financial adviser for a one-off session and asking them to recommend funds. Funds are baskets of shares in different companies put together by a fund manager. They always have a theme, for example, companies from Asia, or luxury goods companies.
If you decide to go it alone, many investing websites, known as platforms, will have recommended lists of funds and stockbroker notes about the prospects for company shares. Some will let you put your savings into a set portfolio of funds created by a professional, called a model portfolio.
There will be different types based on whether you are a cautious, balanced or adventurous investor and an online survey to help you decide which. “If you have a fund that invests in 40 to 100 companies and something happens to one, it will have less of an impact. Diversification is crucial,” says Mr Welby.
Experts emphasise that picking individual company shares yourself is riskier. If you do, make sure you know the company and your reason for investing in it, says Mr Lowcock. “One of the biggest issues with shares is that if you see something tipped it has probably gone up already. Think about what share price target you have and what would be your trigger to sell it.”
Step 4 Things to bear in mind
Costs. A range of charges are levied by investment platforms and you also pay to invest in funds. They can take a good chunk out of your savings over time. Some platforms, such as Hargreaves Lansdown and Fidelity, offer discounts on fund charges while others give regular investors deals on buying shares.
Try to stay committed and avoid accruing charges by buying and selling on a whim. “One of the biggest mistakes people make is trying to get rich quickly and treating investment like gambling. Successful investing is about patience,” says Mr Lowcock.
The bottom line
Some well-known investment sites and their charges for a stock and shares Isa:
AJ Bell 0.25 per cent annual admin fee (max £7.50 per quarter for shares); £9.95 share dealing for the first nine trades a month, cheaper thereafter; £1.50 fund dealing
Bestinvest 0.4 per cent annual admin fee; free fund dealing; £7.50 share dealing
Hargreaves Lansdown 0.45 per cent annual admin fee; free fund dealing; £11.95 share dealing for the first nine trades a month, cheaper thereafter