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By Hayley Millhouse
Head of Advisory Services, evestor
In my previous post, I ran through some ways you might want to seek advice before investing your money.
Next, we’re looking at various ways of investing and how you access those opportunities.
First thing to consider is what you are saving for. It might be a wedding, your retirement or even just for a rainy day, but thinking about this carefully will help ensure you choose the right product for you. Individual Savings Account’s (ISA) are a popular choice as there are no restrictions on when you can access your money, and you get an annual allowance of £20,000 for this tax year (2018/19).
You won’t pay tax on any returns you make on money held in an ISA. If you have extra money to invest, and you’ve already used up your ISA allowance, you can open a General Investment Account (GIA) which doesn’t have the tax advantages of an ISA, but you can invest as much as you want!
There are dozens of ISA providers on the market, but it’s important to pick the right one for you. All will have different benefits and costs, so it’s important to do your research.
There are many ways to invest but here are evestor we’re firm believers in investing in funds.
Remember that the fees a product provider charges do not usually include the financial adviser’s fee (if you use one) and the fees for investing in different funds or assets (these may be one off such as a transaction fee or ongoing such as an annual fee). Charges vary hugely but it’s a good idea to compare them using comparison tables, like this one.
Then comes the fun (well, sort of) part: picking your investments
There are many ways to invest, some of the more common ways are purchasing units in funds or buying individual stocks and bonds. Both have their own advantages, but here are evestor we’re firm believers in investing in funds. This is because they usually hold a diversified mix of different assets, such as shares, bonds and cash and you can pick a risk profile that suits your appetite.
It can be difficult to directly compare all the different funds out there, as they will hold different types of assets (like stocks and bonds) and charge very different amounts in fees. Just remember, the higher the fees doesn’t necessarily mean the higher your returns will be! You’ll need to do your homework to make sure the fund you choose is right for you.
The different types of funds
There are two main ways to manage a fund – actively and passively.
An active fund manager tries to achieve a specific result, such as outperforming a benchmark index (such as the FTSE 100) by actively making decisions. The decisions they make will usually involve buying or selling different assets held in a fund in the hopes they can generate positive returns.
Active fund management sounds like a great idea, however the FCA’s Asset Management study found that many actively managed funds offered similar exposure to often cheaper passive funds.
Passive – or tracker – funds are often cheaper than active funds.
They also found that both actively and passively managed funds rarely outperform a benchmark after fees, which is the entire aim of an actively managed fund (source).
Passive fund management is where the fund aims to track the performance of a selected benchmark, for example the FTSE 100. These are sometimes called ‘tracker funds’. The fund manager doesn’t make active decisions like regularly buying and selling different assets, instead they focus on maintaining a portfolio of assets which replicate the chosen benchmark.
Passive – or tracker – funds are often cheaper than active funds because they don’t aim to outperform the chosen benchmark.
A fund manager and a financial adviser shouldn’t be confused – your financial adviser may tell you what fund to invest in but it is the fund manager who decides what assets are in the fund.
Choosing your own assets
As we mentioned earlier, some people decide to choose the assets they want to invest in themselves and build their own portfolio, rather than invest in a fund. You can sometimes do this within a ‘wrapper’ which is another word for a product like an ISA, so you’ll get the same tax benefits.
Firstly, you’d have to consider asset types. Do you prefer a lower risk government bond, or money market instrument or are you willing to take a risk with shares? If so, do you want to invest in established companies on the FTSE 100 or do you want to take more of a risk with a company launching an Initial Public Offering (IPO)? If so, you’ll have to consider if you have the minimum capital required to invest.
As an individual investor, it’s unlikely you’ll get involved in the complex derivatives market, but you have to be careful not to buy into securities where the risks aren’t clear. An example of this is with structured products, which were sold in the retail market to unassuming customers who did not realise the risks involved.
The FCA produced a Thematic Review into structured products, which concluded that retail customers generally struggle to understand the complex features associated with these products (source).
Then you’d have to think about the countries and industries you want to invest in. Do you stick with the developed countries such as the UK and US, or do you branch out into emerging countries like Argentina and Turkey? It is generally considered far riskier to invest in an emerging market, however historically some of these investments have produced great returns.
Also, consider the exchange rate risk involved in investing in other countries. Then you will have to consider the types of industry you want to invest in: are you an ethical investor, and if so what assets are off limits to you?
Or do you just want to invest in established companies? If so, it is worth remembering that just because you like a brand doesn’t necessarily mean it’s a great investment.
Unless you’re a very experienced investor it’s unlikely you’ll be able to outperform the experts.
If you are buying and selling your own assets, you’ll have to consider that there won’t be a set annual fee. You’ll pay dealing commission, you may lose money on a bid/offer spread and you may have to pay a stockbroker’s annual charge.
You’ll also need to consider if you’re going to hold the shares through certificates or electronically, as both come with varying costs depending on the broker. Of course, there are platforms which can assist with this, but without receiving financial advice you will still have to decide on the investments you hold.
Fund managers, whether they are active or passive, are experts in their field and they are often backed by an Investment Committee and investment analysts who research assets and markets.
They know the industry inside and out, and they have time to keep up to date with the markets. Unless you’re a very experienced investor, or you have a lot of time to dedicate to research and analysis, it’s unlikely you’ll be able to outperform the experts in the field, which is why as mentioned before, we are firm believers in investing in funds.
If picking your own funds or assets seems like a mean feat, you can always take the option to seek financial advice. A qualified individual, or robo-advice system, will help you decide what funds or assets are best for you, and will take into consideration your risk appetite and your goals.
At evestor we offer financial advice in two ways – through our qualified financial advisers and our robo-advice system. Either of these options will help determine the right portfolio for you. If you want to find out more on how we do this visit http://www.evestor.co.uk/.
Head of advisory services for Open Money, Hayley champions making advice affordable and accessible for everyone.