Investing should be a fairly simple process and yet the finance industry has veiled it in layers of complexity and jargon in a way which is self-serving at worst and annoying at best. Let’s break the decision making process into 3 simple parts.
How long should I invest for?
First up, can you afford to stick money away for 5+ years? The biggest disaster with shares is being a forced seller in bad times because you need the cash. Make sure this won’t apply to you and you can ride out the bad times. Conversely, fortune favours the brave and there is little point holding your long-term savings in cash where, in 2018, you are guaranteed to go backwards in real terms. This is because inflation is eating away at your cash at the rate of 2.9% a year. Whilst interest rates are 0.75%. SO the purchasing power of your money gets eroded away.
Where should I invest?
Secondly, you need to decide where to invest. Which investment ‘supermarket’ or online investment service? I factor security, cost, service and help into the decision-making process. I think cyber security is a massive concern so I personally tend to prefer larger brands with large compliance and IT teams. As for charges, you should not be paying more than about 0.5% for administration (the shop) and between 0.25% and 0.8% for the investments (the products on the shelves) , depending on what you pick.
The level of help you need is key. If you want your decision-making to be as little as possible then have a look at some of the newer online investment services such as Nutmeg or Wealthify which offer up ready-made baskets of investments. Fidelity’s Pathfinder service will ask you a few profile questions and then also offer up a ready-made basket. If you are quite interested in choosing a few funds to blend together but want someone to filter out the rubbish, then have a look at Hargreaves Lansdown’s Wealth 150+ list.
What should I invest in?
Thirdly, which investments should you choose? If you’re a beginner I would steer clear of individual shares. Too risky. Funds are a much easier proposition – baskets of shares where you pay a professional manager to pick what is typically about 30 – 60 shares. And you buy a slice of the action with one single choice.
It makes sense to also spread the risk around geographically. We tend to show a ‘home bias’ and gravitate to UK shares and familiar brands. However funds are a simple way to get exposure to international markets as well.
In the UK, I think Terry Smith’s Fundsmith Equity fund is interesting. Or Marlborough Micro Cap UK Growth to access smaller firms. For those seeking a low-cost tracker, Vanguard’s UK FTSE All Share Index fund is a decent option.
Passive funds explained
Finally, if all of this still sounds too complicated, then there is one great choice for beginners. It’s called a passive multi-asset fund. In English, this is an investment ‘ready meal’ where you get someone to decide which countries you should invest in, what investments you should invest in (property, shares, cash) and which stocks you should hold. This is one of the cheapest ways to invest because a ‘passive’ fund just buys the biggest stocks in any market – it doesn’t agonise over which stocks are the best, a decision which can be both wrong and expensive if you back the wrong fund manager.
As an example, Vanguard has a range called LifeStrategy. The only thing you need to decide is which one of 5 ‘flavours’ you want – from mega mild (20% Equity) to spicy (100%). And then they do all the rest and you can disappear and put your feet up. If you are investing for 10+ years then don’t be afraid of spice. I stick half of my pension savings in this and then choose more active funds around the edges for some colour.
Still feeling stuck? Here are three tips from Holly:
Here are what I think are some of the best paths for beginners today, depending on what you’re looking for. I’ve picked out 3 potential journeys.
1) I’m a beginner, on the go and want something quick and easy = put £10,000 with Nutmeg
My test portfolio with Nutmeg is Risk Level 10 and is 88% in developed market equities (currently circa 48% in the US and 21% in the UK), with small amounts in commodities and emerging markets. These decisions are all made on my behalf by Nutmeg. The most popular and mid-range option is Risk Level 6. Annual all-in fees are circa 0.94%. Wealthify is a similar service which has nice online features and has big group Aviva as a major shareholder which provides a level of comfort.
2) I’m getting started and want the cheapest, easiest option = go to Vanguard, open up and ISA and stick £10,000 in one of their 5 LIfeStrategy funds
A mid-range risk option of the Vanguard LifeStrategy 60% equity option will see about £6,000 invested in stocks, the rest largely in bonds and cash. The fund currently has 35% US exposure, 26% in the UK and 7% in Japan – these allocations are all decided and tweaked by Vanguard, removing the decision-making from the customer. This tracker funds costs 0.22% a year. Those investors with long-term horizons of 10 years plus might want to consider the 80% or 100% equity options. There’s an additional admin fee of 0.15% for the ISA which brings the all-in cost to 0.37% a year.
3) I want to choose a few interesting options with a low-cost foundation = Hargreaves Lansdown (supermarket) with Vanguard LifeStrategy (investment) as a base (£5,000) and a few additional funds (£5,000)
I think putting half in the LifeStrategy fund provides a sensible low-cost base. I would additionally allocate £1,000 to one of the UK funds mentioned above.
On the international front, I would put £2,000 with Lindsell Train’s Global Equity fund. Top holdings are currently Unilever, Diageo and Heineken. I like this fund because they only hold 27 shares – they have conviction and don’t muck about copying everyone else. The Scottish Mortgage investment trust has nothing to do with Scotland or mortgages but is a very long-standing investment option which is solid and I like. Holds companies like Netflix, Tesla, Alibaba and Ferrari. For the rest I would look to put it into a mix of global funds such as those mentioned above or have a look at Hargreaves Lansdown’s Wealth 150+ fund shortlist for inspiration.
The annual charge for holding this collection of funds on the Hargreaves service including the ISA admin fee would be circa 0.9% - 1.0% all-in.
Holly is the founder and MD of Boring Money. She holds over 20 test accounts with online investment providers.
An edited version of this piece appeared in the Sunday Times on 19th February 2017. The article has been reviewed and suggestions refreshed as at 28 September 2018.
Join the thousands of people who get our weekly musings on money, great products, top tips and a dollop of opinion.Sign up for Holly's Blog
What have other people been doing? Learn from their experiences.
You may think the stock market is risky but you know how important it is to save and are fed up with getting pennies in interest each year. Overcome your suspicion and see what investing is really like.Suspicious Savers