First-time investors have to take the leap
If you're fed up with paltry savings returns, then you should look at equities. Rob Griffin offers some tips.
Friday 19 July 2013
It's not an easy time to be an investor. With interest rates at record lows, anyone wanting to earn an above-inflation return needs to consider more potentially lucrative sources of investment. However, that means embracing the associated risks.
The question is where to start? Should you immediately establish yourself as a day trader buying and selling shares? How about dipping your toe in the water by investing in government bonds? What about a mix of assets?
There are certainly plenty of options facing would-be investors but your priority should be to ensure you know why you're investing and whether you have a time-frame or life event in mind, advises Jason Witcombe, director of Evolve Financial Planning.
You should also consider clearing outstanding debts first, he suggests, because the higher the interest rate you're paying on credit, the higher the return you'll need – net of tax and charges – to be better off by investing.
"If the investment is for the long-term, equities should do better than bonds and cash but will be more volatile," he says. "There will be periods of time where they underperform other assets but in the long run risk should be rewarded."
The next step is assessing your attitude to risk and capacity to withstand losing money, points out Andy Gadd, head of research at Lighthouse Group.
"Investors must look at their risk profile, capacity for loss, aims and objectives, and time scale," he says.
While difficult to generalise, lower-risk investors generally prefer to put their money in safer investments such as bonds and pooled investments of different assets.
A medium-risk investor, meanwhile, accepts they will have to embrace a certain amount of uncertainty to stand a chance of generating a decent return, but at the same time they won't feel comfortable putting all their money into funds focusing on volatile areas.
Finally you have the higher-risk investors. These will want to generate the highest-possible returns – even if that means they run the risk of losing the lot if the stock market turns against them.
The reality is that most investors need to have a range of assets in their fund to provide diversification and reduce risk, according to Geoff Penrice, a charted financial planner at Astute Financial Management.
"The mix of assets would depend on the investor's attitude to risk," he explains. "A more-adventurous investor would have a higher proportion in growth assets such as shares, commodities and property, whereas a more-cautious investor would have a higher proportion in income-producing assets such as cash, corporate bonds and gilts."
Buying a fund that invests in a range of companies is a safer option for first-timers than buying individual shares or bonds. Similarly, they may prefer to pay higher charges for the further diversification provided by multi-manager portfolios which invest into funds.
Whichever route you choose there will be plenty pitfalls, warns Mr Penrice, and top of the list is following trends. "There is a temptation for all investors to follow the fashion," he says.
"It might be the 'in' fund or asset class, such as technology in the late 90s or property a few years ago, but it can be a recipe for disaster as investors tend to go in at the peak, only to see values fall."
He also warns against being either overly confident or overly risk averse. "There is no such thing as a 'dead cert' because there is always risk involved," he says.
"However, there can also be a tendency to be put off investing due to worries over short-term losses. This can stop investors making the right, long-term decisions.
"You also shouldn't sell when the market drops as it will recover if you hold your nerve."
So what asset classes or geographical areas currently look the most attractive? That is the most-challenging part of the entire process, according to Mark Dampier, head of research at Hargreaves Lansdown and the writer of our weekly Analyst column.
"There's no such thing as really low risk if you're coming out of cash," he says. "These are also the most difficult investment conditions that I've known in 30 years as you've got a lot of manipulation going on by politicians and banks," he adds.
Traditionally safer areas, such as bonds, are looking expensive at the moment, Mr Dampier points out, so although funds linked to them have done well over the past decade the chances are that the next 10 years won't be s o lucrative.
"As a first-timer, I'd look for something like equity income because you can either take the income or reinvest it," he says. "The point is you are more likely to get some sort of return whereas investing in a growth fund might mean you get nothing at all."
He also suggests looking closer to home for investment solutions.
"People in the UK generally write off their own stock market, but if you're a novice investor that's wrong as it's a great place to start," he says. "It's a market you can read about, start to understand and see some of the companies that are in your portfolio."
Patrick Connolly, a certified financial planner at Chase de Vere, advises first-time investors to take a long-term approach, ignore market sentiment and be especially wary of investments which have performed strongly in recent months.
"They should usually avoid higher-risk or more specialist investments unless they fully understand the risks, are investing monthly premiums, and are prepared to take a long-term perspective of at least 10 years," he says.
Investors should also consider paying regular premiums on a monthly basis rather than putting in one lump sum, he argues. This allows people to to take advantage of an investment technique that is known as pound cost averaging.
"By investing regular premiums you negate the risk of market timing because if the market goes down you simply buy at a cheaper price the following month," he explains.
'investors must look at their risk profile' andy gadd, lighthouse group
Recommendations: What the experts say
Market experts reveal which funds are worth considering for first-time investors – and why...
Andy Gadd at Lighthouse Group likes F&C's MM Lifestyle funds and suggests they can provide an ideal solution for investors who are seeking a one-stop shop, multi-manager approach to investing. "These funds are run by one of the industry's best-resourced and most-experienced multi-manager teams," he says.
He also says the F&C MM Navigator Distribution Fund is worth considering for some investors because it aims to provide good, consistent income payments as well as the longer-term preservation of capital.
"It invests across a range of different types of investments and between 25-35 funds," he explains. "This means it benefits from more than 1,300 underlying income-paying stocks at any one time, so income is not reliant on a certain investment style, asset class or region."
Patrick Connolly at Chase de Vere suggests that a good, low-cost option for investors is a UK tracker fund, which provides broad exposure to the UK stock market. He cites the HSBC FTSE All Share Index Fund as one such option.
For those willing to take more risk – but maintaining a cautious approach at the same time – he believes the Cazenove Multi-Manager Diversity Fund could be a good option as it spreads risk by investing a third each into shares, fixed interest, and other investments.
"For those who are happy to take greater risk, then exposure to more-volatile areas such as emerging markets can be considered," he adds. "These have the potential to perform very well over the long term, although performance is likely to be volatile. A good choice is JPM Emerging Markets Fund."
Darius McDermott, managing director of Chelsea Financial Services, says bonds are no longer so attractive, having been on an extended bull run. Consequently, he believes better value can be found within the areas of multi-asset, property, and equity income.
His first suggestion is the CF Miton Special Situations Fund which aims to provide long-term growth by investing in a portfolio of other authorised funds. It has exposure to a wide range of areas, including global bonds, international equities, and property.
"It has a cautious manager that actually made money in 2008 (during the financial crisis), that has a high cash weighting and does particularly well in difficult markets," he explains. "It's a bit like a one-stop-shop."
Mr McDermott's other recommendations include the Threadneedle UK Equity Alpha Income Fund for its experienced management team; Legal & General Dynamic Bond for its strong total return mentality; and Henderson UK Property.
Mark Dampier at Hargreaves Lansdown suggests a good starting point for investors would be the Artemis Income Fund run by the highly experienced Adrian Frost. "You can take the income or reinvest it," he says. "If you want to have a wider global spread of assets then consider buying something such as Rathbone Global Opportunities."
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