18th March 2016
Tipping your toe into the world of stocks and shares can be daunting; here’s four things you need to look out for when investing for the first time.
The Share Centre head of investment research Andy Parsons said everyone, bar those who are set to inherit a fortune, has to make their money work harder. This is especially true in a low interest rate environment which continues to persist and ‘will likely remain so for the foreseeable future’.
‘Furthermore, inflation remains benign, reiterated by the chancellor stating in the latest Budget that it is forecast to be below the 2% target in 2016, with the hope of returning gradually to 2% in 2018,’ said Parsons.
‘At present a stocks and shares ISA could therefore provide investors with an opportunity of a greater reward.’
However, before you jump into investing, Parsons said there are four areas you need to consider.
Setting a savings target is a good way to keep yourself on track but your target should be unrealistic or you will come up short.
‘The first thing you have to contemplate is your investment objective – what are you saving for and how much risk are you prepared to take with your money?,’ he said. ‘Whether it is your first home, a wedding or university fees you need to visualise the amount needed and the length of time in which you want to achieve this. Don’t set unrealistic targets and appreciate that your attitude to risk will be a key determinant as to whether your dream has any chance of fulfilment.’
Once you know what your goals are you can think about how much you need to put away to achieve them.
‘Once you have an appreciation of the investment pot required to reach your goal, you can begin to think about how you can get there,’ said Parsons.
He recommended using an ISA calculator to work out how much your money can grow.
‘You can input your monthly contributions, timescale and a projection rate and it will give you a much better idea of whether your dream is merely that or is actually potentially achievable,’ said Parsons.
‘Don’t be greedy, if you can’t afford to invest too much and accept a higher degree of risk, reappraise your visions and set a more realistic target.’
The investment strategy you take will depend on how much time you have to achieve your goals, said Parsons.
‘If you have little or no time, then you could consider an open ended, low risk fund that tracks an index such as a tracker fund or ETF,’ he said.
‘This way you will be spreading risk, incorporating some diversification and ultimately keeping your costs down, increasing your chances of profitability. For a first time investor, we would recommend something along the lines of a tracker that aims to replicate the FTSE All-Share index.’
However, if you have more time Parsons suggested ‘building your own diverse portfolio by introducing individual equities alongside a fund or investment trust’.
‘A little due diligence is needed to make sure you are not over exposing your portfolio to a particular sector or region, or allowing any one individual company to become a significant proportion of the overall portfolio,’ he said.
Don’t only think of the upfront costs of investing, you need to think about the long-term position.
‘The administration costs are often stated as either a percentage of the holdings or a flat fee. Remember that with a flat fee, you’ll always know the total cost each year. Whereas with a percentage based arrangement it’s determined on the value of the underlying portfolio and if that grows, so does your charge,’ he said.