PREPARE FOR RISK-TAKING
If you decide to brave the stock market for the first time, you must first accept that your investments will go down in value some of the time. While the long-term direction of the stock market is up, it doesn’t rise in a straight line. The rule of thumb is that the more risk you take, the greater the potential return, but also the greater the potential loss. You will need to construct a portfolio with a risk profile that suits you. Financial planners (see right) can offer help to put together an Isa portfolio according to your attitude to risk. These suggestions can also help if you want to overhaul an existing portfolio.
Your first move is to open an account with a fund shop or broker from which you can control where your money is invested. There are lots of companies to choose from.
You should make your selection based on the research they provide, how easy their website is to use, range of investments available and, of course, price. A fee is charged for holding your investments, which can seriously eat into your returns. See our table at telegraph.co.uk/isas for a comparison of the most popular fund shops and brokers. From here, you can choose the funds to go inside your Isa.
When it comes to picking the right investment, you must decide what you want to achieve, what access you need to your money and, crucially, what risk you can take. Matching your attitude to risk with your investments is key. Patrick Connolly, an adviser at Chase de Vere, said: “You can invest in high-risk funds, such as emerging market equities, in a low-risk portfolio. You can also invest in low-risk funds, such as fixed-interest funds, in higher-risk portfolios. What you must ensure is that the weighting you have in each asset class and each fund is appropriate to your overall risk profile.”
DIY investors also make mistakes. When stock markets are performing well, investors become more confi-dent and are willing to take more risk. But this often leads to buying at the top of the market when strong gains have already been made.
On the flip side, when stock markets are performing badly, investors worry about losing their money, become far more cautious and often sell out when losses have been made. Tinkering too often and trying to time markets can lead to losses. Even the experts can get it wrong (see the back page for more on mistakes).
You might prefer to enlist the help of a professional who can give you a wider assessment of your financial needs and goals, and help match you up with the right funds. You can find an independent adviser in your area on the websites unbiased.co.uk or vouchedfor.co.uk.
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If you are going to lose sleep when the markets fall, consider yourself a low-risk investor. The typical time to hold a low-risk portfolio is as you approach retirement when you will have less time to claw back any losses before you’re likely to need your money. Younger savers might be cautious, too. A new job or house move, or perhaps a new addition to the family, could make you more cautious during your 30s or 40s, prompting you to adjust the risk profile of your investments.
A low-risk investment portfolio could be made up of the same assets as a high-risk one, but with less money in the higher-risk ones.
Consider a low portion – around 35pc – in equities and the biggest share at 50pc in fixed interest, namely strategic bond funds where managers have discretion over the type of fixed-interest assets they hold. The remainder at 15pc would be spent on property funds.
Equity income funds are often the first port of call for an investor, forming a core holding of a typical investment portfolio, such as Threadneedle UK Equity Income. There is a growing case for adding extra global exposure to an equity income portfolio, as well as the fact that it offers a good way of ensuring your income portfolio has a healthy level of diversification. The JPM US Equity Income fund would offer this. For fixed interest, look at the Fidelity Strategic Bond and for diversification, the M&G Property Portfolio invests directly in commercial properties.
An absolute return fund such as Premier Defensive could suit a low-risk investor, according to Hannah Edwards at BRI Wealth Management. “Manager Paul Smith has a long track record in low-volatility investments,” she said. “The fund seeks to generate cash plus returns while ensuring lower volatility than is typically associated with equity markets.”
You might want to buy a low-cost tracker.
Source: FE Trustnet
If you don’t feel that a low-risk portfolio is racy enough, or that your current low-risk set-up simply isn’t producing the returns you would like, then you might like to steps things up a gear.
In that case you should brace yourself for more volatility in the value of your capital, although this shouldn’t worry savers who are in it for the long haul and who have plenty of time for their money to recover.
Philippa Gee, of Philippa Gee Wealth Management, said: “For medium risk, use a range of different funds that, when combined, meet the sort of risk tolerance you would be aiming for. Individually they might have a higher or lower risk and, therefore, the blend is a key part of the picture.”
A medium-risk profile portfolio would have a broader exposure to markets with a bigger proportion – around half – in equities. Two good picks are the HSBC FTSE All-Share Index fund, which tracks UK companies, and the Vanguard US Equity Index fund, which will give you exposure to companies that are quoted in the United States.
As tracker funds these are low-cost. Their returns simply mirror the market, and this eliminates the risk of a manager underperforming.
To access growth in Europe, look at JPM Europe Dynamic. You can buy a special version of this fund that “hedges” against currency movements, which is useful given that the value of the euro has been falling. Ms Gee tipped Invesco Perpetual Global Equity Income to add exposure to global markets.
A medium-risk portfolio would have around 35pc in fixed interest, perhaps in the Kames Strategic Bond. Patrick Connolly, of Chase de Vere, said Henderson UK Property would suit a medium-risk investor.
HIGH- RISK PORTFOLIO
Those investing for the longest periods can afford to take more risk. Volatility resulting in losses in the short term shouldn’t matter because you have time on your side that can be used for markets to recover.
Yet even the boldest investor must ensure they have a diversified range of investments to spread that risk across different asset classes. High-risk portfolios will have a much bigger slice in stocks and shares – at around 70pc – increasing exposure to the UK, emerging markets and Asian equities, in particular, which are arguably the riskiest of all.
For more UK exposure, Mr Connolly suggests Artemis UK Special Situations, where manager Derek Stuart invests in shares that are out of favour (in other words, cheap).
Smaller companies provide more opportunity for faster growth. While these can be volatile in the short term, they can provide decent returns over the long term.
Aberforth Geared Income Trust is a lesser-known fund that targets a 6pc yield plus potential for growth by investing in UK-listed undervalued smaller companies.
Ben Willis, of the wealth manager Whitechurch Securities, said: “Aberforth commit a significant sum of their own money to this investment trust, adding credence to the view that this is a strong opportunity for the long-term investor.”
M&G Global Emerging Markets will offer exposure to emerging markets. For Asian stocks, First State Asia Pacific Leaders is a popular choice with advisers.
For low-cost access to American markets, Mr Willis tipped the L&G US Index Tracker. “The fund offers investors an extremely cost-effective way of accessing a notoriously efficient equity market,” he said.
Meanwhile, fixed interest and property holdings will shrink to around 15pc each.
STATS ON DIY INVESTING
• 12%: The annualised return since 1988 of RIT Capital Partners, the global investment trust
• 58: The age at which today’s 40-year-old will be able to access their pension under the new rules
• 28: The number of years it takes to save £1m using your full Isa allowance each year, if it grows by 5pc annually
• 131: The number of ‘Isa millionaires’ – people whose accounts top £1m – according to the five biggest brokers
• 13.5m: The total number of Isa accounts opened by savers in the FTSE 100 index accounts opened by savers in 2013-14 tax year, according to HMRC
• £10bn: The amount invested by over-65 savers into NS&I pensioner bonds since their launch in January
• 56%: One-year returns generated by the top Indiafocused fund, Aberdeen Global Indian Equity
• 38%: The drop in the gold price since its all-time high was reached in July 2011
• 0.07%: The charge per year of the cheapest tracker fund available, from BlackRock
• £15bn: The total money estimated to sit in ‘dormant’ bank accounts
• 2.69%: The best return on a five-year bond, paid by Secure Trust Bank on amounts up to £1m
• 3.5% The dividend yield of the FTSE 100 index of leading British shares
• 16: The price-to-earnings ratio of shares that make up the FTSE 100 index