Whether you are starting from scratch, or want to make more of money you’ve already put aside, there has never been a better time to become a DIY investor.
From things to invest in, to ways to do it, the wealth of opportunities on offer to personal investors make it simple and cost-effective to take control of your money.
Yet many of those who already have plenty of rainy day savings built up still shy away from investing.
Ask why and the two main reasons will typically be that either investing is too complicated, or the risk of losing money is too great.
Certainly, it is true that investing does require a little work.
It is also absolutely vital that investors understand that in return for the reward of higher potential returns than you can get with cash savings, they must take the risk of a fall in the value of their investments.
But if you are willing to accept this and think long-term, then investing can be a very rewarding endeavour, with the potential to grow your wealth substantially.
We explain how to be a DIY investor and get started on a road that will hopefully take you to riches.
Why invest?
Hargreaves Isa Guide
The first thing to remember about investing is that it needs to be a long-term game. Over time a wisely-picked investment should deliver good returns, but its value can fall as well as rise. To put it bluntly, you need to be aware that you can lose money.
The way to think of investing is not as a get-rich-quick operation – that’s trading, which is a completely different ball game - but as a way of making your money work harder over time.
The often-cited Barclays Equity Gilt Study shows that £100 invested into shares in 1945, with dividend income reinvested, would be worth £131,469 in 2010. Salted away as cash with interest reinvested it would be worth £61,195.
This is not to suggest you should pile all-in to the stock market right now, but there are plenty of people who should probably be making their money work harder, so it at least pays to find out more.
It is also the case that if you are not one of the generation that will benefit from final salary-style defined contribution pensions, your retirement fund will most likely be riding on investments.
When should you start investing?
There
is an old adage that says ‘never invest money that you can’t afford to
lose’. Working on that basis is a little misleading, however, as most of
us wouldn’t say that we can afford to lose any money at all.
A better rule is not to invest money that you may need quick access to for essentials or a minor emergency
The
rule of thumb is that you should have at least three to six months’
worth of your post-tax income in an easily accessible savings pot. It
may be not be earning you a great rate of interest, but it will be there
to pay the bills if you lose your job or the boiler conks out.
When
opting to invest, it is also always worth evaluating whether the
potential return you will get from it is worth the extra risk that you
are taking over putting it in a savings account (use these correctly and
your cash in there is fully protected.)
You
also need to think about what you are investing or saving for. If you
are looking to hit a set goal over the short term, such as a house
deposit or wedding, risking your precious funds may be unwise.
No
one wants to put their hard-won cash into a fund and then lose 10 or 20
per cent, and the fear of losing money always looms large when
investing. Drip feeding a lump sum in and regular investing are ways to
try and weather the storms while still reaping rewards when the sun
shines, but whatever you do, investing will always involve some risk.
Why be a DIY investor?
DIY investing: could you get on the road to riches?
Personal investors are currently blessed with greater options on how and where to invest than ever before.
The
crucial driving force behind this has been the emergence of
execution-only DIY investing platforms. These mean that investors no
longer need to call a broker or financial adviser to buy and sell.
Instead they can delve into the wealth of information, research and
charts available and do it themselves for lower fees.
The
rise of the DIY investing platform allows investors to access funds,
shares, investment trusts, exchange traded funds (ETFs) and bonds from
the comfort of their computer, or even smartphone now in some cases.
Competition has driven investing costs down at the same time as it has driven the quality of services being offered up.
In
the meantime, a shake-up of the financial advice market means advisers
must now charge fees rather than earn money through commission.
There
is still, of course, a vital place for financial advice for those who
are unsure about what they are doing or do not want to take on the
responsibility of choosing where to invest themselves.
But
with advisers quoting rates running into hundreds of pounds per hour or
per item, those happy to use the wealth of information out there to
pick their own investments can do it themselves easily and cheaply.
The power of regular investing
When it comes to building your fortune, regular saving or investing can deliver handsome returns.
The
simple act of getting some spare cash out of your bank account each
month and into your nest egg can work wonders for the pot.
One of the advantages of investing
this way is that it removes the temptation to try and time the market,
something that is notoriously difficult to do and that most
professionals fall short on.
Setting
up a direct debit for just after payday gets the sum that you are
salting away out of your clutches before you can spend it, and you can
also benefit from many DIY investing platforms’ lower costs for regular
investments.
The
advantage of continuing to invest small amounts regularly, even when the
market is down, is that these are the times when you are buying in
cheaply. The idea is that as long as you are picking quality
investments, when prices rise again you will be up. It may sound counter
intuitive to buy when the market is depressed, but the simplest rule of
how to make money is to buy low and sell high.
A
caveat to this, of course, is that you are buying a quality investment
and not just ploughing money into a firm that is slowly going down the
tubes – this is somewhere that spreading risk through a fund or
investment trust can pay off.
How to invest
When
it comes to investing, middleman can be your friends. The best bet for a
DIY investor is one of the many investing platforms available, ranging
from those that offer funds only, to those that allow you to invest
across shares, funds, investment trusts, bonds and more.
These will allow you to set up an
account online and then pay in a lump sum to invest how you choose, or
sign up for regular direct debit monthly payments into a selection of
investments - or do both.
Most
platforms are very simple to use and easy to get used to. They will
offer varying degrees of tips, analysis, tools and service.
The
competitive market for DIY investing platforms has driven down costs
and improved service. Some charge an administration fee and fees for
buying and selling, while others opt to earn their money from fund
commission and offer ‘free’ dealing. Many sit somewhere in between these
two models.
Before deciding on your investing Isa or platform, it is worth considering why your choice matters.
Making
the most of investing is not just about picking investments wisely,
it's also important to make sure you hold them in the best place because
this cuts the fees and charges that eat into your hard-won returns.
That difficulty in choosing comes in part from some good news.
Platform
providers now offer to return some or all of the annual commission to
fund investors, which is a great sign. Isa charges in many cases are
also now broadly similar to standard investing platform charges.
However,
a more complex factor, is that DIY investors can hold a variety of
assets in their Isa - not just one fund or a handful of them.
Charges
vary for those Isa investors choosing to hold investment trusts, ETFs,
shares and directly traded corporate bonds, alongside traditional
managed funds in the form of OEICs and unit trusts.
Investing in funds, investment trusts or shares
Shares
Investing in shares directly has long been a popular option and can be very rewarding, but is a path laid with traps.
If
you do decide to pick individual shares then make sure you research
companies very carefully, learn to understand how to read their balance
sheets and financial statistics and don’t just get swept along by what
the hot tips of the moment are.
The
classic share investor’s mistake is to buy too few different companies.
A report by specialist magazine Investors Chronicle says the ideal
number of shares for a portfolio is 15, spread across different sectors.
In reality, many investors hold less and end up far too concentrated on one particular sector or market.
Funds and investment trusts
A
simple way around this is to invest in either active funds or
investment trusts, where a fund manager chooses a basket of shares for
you, or in passive tracker funds or exchange traded funds, which follow
an index up or down.
Fund managers will tell you that the
advantage of an active fund is their expertise but you actually have to
choose the right manager to benefit from this. Many consistently fail to
beat their benchmark and still levy their fees - a handful do actually
outperform year after year.
Bonds
Funds
are also a popular way to invest in bonds. These are essentially IOUs
issued by companies and governments to borrow money from investors over a
period of time in return for a set repayment each year and their money
back at the end of the bonds life. Picking individual bonds is possible,
but once again investors need to be careful to spread their risk.
Investment trusts vs funds
The
crucial difference between investment trusts and funds is that
investment trusts are listed companies with shares that trade on the
stockmarket, while funds simply rise or fall in value in line with the
assets they hold.
Trusts invest in the shares of other
companies and are known as closed end, meaning the number of shares or
units the trust's portfolio is divided into is limited. Investors can
buy or sell these units to join or leave, but new money outside this
pool cannot be raised without formally issuing new shares.
Investment
trusts can be riskier than unit trusts because their shares can trade
at a premium or discount to the value of the assets they hold, known as
the net asset value.
For
example, a trust's price can fall below the total value of its
holdings, if it is unpopular and people do not want to invest but do
want to sell, thus pushing down demand and driving up the supply of its
units for sale. This gives new investors the opportunity to buy in at a
discount, but means existing investors holdings are worth less than they
should be.
Investment
trusts tend to be a lower cost option than funds, with no initial
charge and lower annual fees. However, buying incurs share-dealing
charges, and again a good DIY investment platform will cut these.
