GETTING STARTED

Many investors fall into one of two camps. They recognise the need to save for a better future and want to start investing in hope of generating better returns than cash. Or they have already amassed some wealth and want to put the money into the markets to generate an income in later life. Both types can be united by a lack of experience with investing.

One of the most popular questions we’re asked at Shares is: ‘How do I start investing?’ These individuals have a desire to succeed but need a helping hand to begin their investment journey.

Fear not, as this article is here to help anyone who feels they are in this situation. Remember that even the most experienced investor was once sat where you are now – everybody has to start somewhere.

And if you’re already experienced with investing, you may find it helpful to show any friends and family this article if they are looking for some guidance with how to approach the markets.

PUTTING THE MARKETS TO WORK

At their heart the markets are simply a tool with two main uses: to protect and augment your wealth. If you can train yourself to think in these terms then any fears you have about investing should begin to dissipate.

Why should you go to the trouble? If you are prepared to accept the dismal returns offered by keeping your savings in the bank then you don’t have to explore the world of investing.

But low interest rates mean that cash on deposit is not generating a sufficient return to outpace inflation. If you want to protect the real value of your money, then doing nothing is not an option.

Over the long-term stocks and shares have delivered returns over and above the average rate of inflation.

And the good news is they do not just offer the potential for capital gains – many also offer a steady stream of income from dividends.

By reinvesting these payouts investors can tap the full potential of the stock market and not just guard their wealth but also boost it significantly.

THE BIG QUESTIONS

Before you actually start investing there are some important questions you need to ask yourself. The first is: what are you investing for?

You may be looking to top up a pension pot in order to make suitable provision for your retirement.

It would be naive not to give this serious thought, given the cancellation of many companies’ final salary pension schemes and the fact that state-backed universal pension provision is looking increasingly unsustainable. Prudent investment could be your route to a decent standard of living in your seventies, eighties and beyond.

Or you may be looking to build up a nest egg to pay for your children’s education, purchase a dream home or finance a round-the-world-trip.

This question of what return you should expect from your portfolio is also dependent on the yardstick you measure its performance against.

First of all, it almost goes without saying that you will want to beat the miserly returns available from most savings accounts. A more realistic benchmark could be yield on the 10-year UK government bond, also known as gilts.

An investor holding gilts to the point at which they mature will receive regular interest payments which – unless the UK itself goes bust – are guaranteed. This makes gilts an almost risk-free investment against which to compare alternatives.

In our view, you should be aiming for an investment return of at least 7% a year to compensate you for putting your capital at risk in the markets.

This is an important point to remember. Premium returns are not possible without taking on a degree of risk – investing your cash means risking it.

The key is to ensure that you can generate your required return at an acceptable level of risk. The good news is there are plenty of different investment options with different risk profiles to suit different types of investor.

Overall, it is important to set your expectations at a realistic level. Successful investors often enjoy small but steady returns. We would suggest that 7% to 8% return per year from a mixture of capital gains and income is much more realistic than making 20%+ returns by gambling your fortunes on a small number of individual company stocks.

Only once you’ve mastered the art of investing should you expect to make these kind of returns.

CHOOSING A PLATFORM

Before you consider what to invest in, you need to consider how you will invest. This means opening an account with a stockbroker or investment platform.

Most people will look to invest through an ISA in order to keep the bulk of their returns out of the taxman’s grasp. You can invest up to £20,000 a year in an ISA and you don’t have to pay any tax on capital gains and dividend income for investments kept inside this wrapper.

It’s also worth considering paying as much as you can into a pension, assuming you don’t need the money until age 55. You can pay the equivalent of your earnings into a pension each year, up to a maximum of £40,000. If you’re a basic or higher rate taxpayer, you’ll get 20% income tax relief and if you’re an additional rate taxpayer you’ll get 25% tax relief.

Helpfully, most brokers or investment platforms offer execution-only share dealing accounts, SIPPs or ISA wrappers. Under an execution-only remit a stockbroker will buy or sell according to your instructions without providing any form of advice.

However, a lack of advice should not mean a lack of support and it is important to pick a broker which is transparent, user-friendly and efficient. Have a read of reviews on the internet to see what other customers are saying about the level of service, for example.

After all a stockbroker is there to help you build and maintain your portfolio. Given this vital role it is really important to make the right choice.

If you do not shop around for a good broker you could end up facing prohibitive charges when you buy and sell assets such as shares, investment trusts, funds, exchange-traded fund (ETFs) or corporate bonds.

WHAT TO INVEST IN?

With literally thousands of investment options it can be hard to know where to start.

We will now look at some ideas for a starter portfolio to help get you thinking about how to achieve broad-based market exposure, looking at funds which can beat the returns from the wider market, as well as getting exposure to bonds, alternative assets and commodities.

To come up with our model portfolio we have drawn on the expertise of the Shares team and made use of AJ Bell’s Favourite
funds list – a collection of collectives which have been curated by its experts.

For the most part we have concentrated on traditional funds for this exercise. But we’ve also included a separate article in this week’s issue of Shares which is packed full of low-cost exchange-traded fund (ETF) ideas for inexperienced investors.

BROAD-BASED MARKET EXPOSURE

Fidelity Index World Fund (BLT1YP3)

This tracker fund charges just 0.12% a year to track the MSCI World Index. This mirrors the performance of companies from 23 developed countries, boasting 1,643 constituents and covering roughly 85% of the investable equity universe in each of these countries. It therefore enables you to create a diversified portfolio in a single trade.

The dominance of the US market is reflected in a 60.9% weighting and the fund has heavy exposure to technology with Apple, Microsoft and Google’s parent Alphabet among the largest constituents.

TRYING TO BEAT THE MARKET

Franklin UK Mid Cap (B7BXT54)

While using a tracker fund to achieve broad market exposure can offer a useful foundation stone for your investment portfolio, you may also want to see if you can find a fund manager who can consistently beat the market.

Managed by the experienced Paul Spencer alongside Mark Hall and Richard Bullas, Franklin UK Mid Cap has achieved a decent long-term performance by investing in high quality, sustainable businesses. This is underpinned by the strong historical performance of mid cap stocks in general.

Unlike large caps, mid-caps typically have more significant growth potential and could increase their profit at a rapid rate if things are going well.

Companies on the FTSE 250 are not as widely followed as those on the FTSE 100 so there can be more opportunities to spot companies whose earnings potential has been underestimated.

Top holdings in the Franklin fund include property investor Derwent London (DLN) and film, TV and music rights business Entertainment One (ETO).

Alternative suggestion: TB Saracen Global Income & Growth (B3XPLG5). This fund offers genuine global exposure to firms with sustainable growth potential and avoids risky business models in an attempt to limit losses.

FOCUS ON FIXED INCOME

TwentyFour Corporate Bond Fund (BSMTGJ1)

Debt securities like bonds and gilts, also known as fixed income investments, offer the attraction of greater security than stocks and shares alongside regular income and can be a good option as part of a balanced portfolio.

TwentyFour is a specialist asset manager which is entirely focused on bonds. Headed by experienced lead manager Chris Bowie, the team behind this fund use a proprietary ‘Observatory’ screening tool to help select bonds. This results in a concentrated fund which typically includes fewer than 100 individual bonds. For the most part the focus is on the UK which accounts for just more than 70% of the portfolio. The ongoing charge is a competitive 0.39%.

Alternative: Vanguard UK Inflation-Linked Gilt Index Fund (B45Q903). This low-cost passive fund might suit cautious investors who want exposure to typically lower yielding but also lower risk government bonds.

KEEP UP WITH COMMODITIES

BlackRock Gold and General (B5ZNJ89)

For an ongoing charge of 1.17% this long-standing fund invests your cash in a grouping made up principally of gold miners. Gold’s position as a traditional store of value means it can often deliver returns which uncorrelated to equity markets. The team behind the BlackRock fund hope to outperform the gold price through benefiting from the operational excellence of the individual miners it invests in.

It is worth noting that a commodities fund should only be considered once you have a solid backbone to a portfolio, such as through the aforementioned equity market and bond funds. Commodities are high risk and unpredictable, so you should consider putting less money in these types of funds. They provide ballast to a portfolio but shouldn’t be a large component of your overall investments.

Alternative: Guinness Global Energy (B3CCJC9) Launched in 2008, this specialist energy fund has around half of its assets in the US, 15% in Canada and a little over 10% in the UK, providing genuinely global exposure to a recovering industry.

ALTERNATIVE ASSETS

First State Global Listed Infrastructure (B24HJL4)

This fund invests in a diversified portfolio of global listed infrastructure and infrastructure-related stocks.

Infrastructure assets can be attractive to investors as they involve the provision of essential services, enjoy significant barriers to entry with a generally dominant market position. They often have lives of 30-plus years, have low ongoing operational costs to compensate for the high upfront costs and deliver long-term stable cash flows which are often linked to inflation.

First State’s holdings include East Japan Railway and leading North American energy infrastructure business TransCanada. The team behind the fund have a big focus on capital preservation.

Alternative: Janus Henderson UK Property PAIF (BP46GF5). This fund looks to deliver over the long-term by investing in a portfolio of UK commercial property built around quality properties with reliable tenants.

BENEFITS OF REGULAR INVESTING

How much you invest will be down to your personal circumstances. You may have a lump sum already sitting in cash, but don’t worry if this is not the case as you have the option of drip feeding money into the markets at regular intervals.

The latter approach even has some advantages. Stock markets can be volatile and there is always the fear of a market correction, with significant falls in share prices over a relatively short period.

Precious few investors have the skill to buy and sell shares at exactly the right time. For this reason, it is often said that it is ‘time in’ the market not ‘timing’ the market which delivers the best returns.

Regular investment means you remain invested over the long-term and it could also see you benefit from an effect known as ‘pound cost averaging’.

If, for example, you are investing a set amount, say £100 per month, you will end up buying more shares when prices are lower and fewer shares when prices are higher.

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