The Armchair Trader concludes its ‘Beginner’s Guide to Investing’ today. We explain how to build an investment portfolio for beginners and the importance of diversification and maintaining performance. Plus we’ll cover the importance of choosing the right broker – can they give you access to the investments you want, and how much do they cost?
If you missed the first two parts, you can find them here.
What do advisors do?
You should start to feel as though successfully investing in equity markets is something which everyone can achieve, and not something which can only be accomplished by financial experts. Yet, year upon year, financial advisors earn huge sums of money as their services continue to be in very high demand. Be warned: although established advisory services have a history of consistent returns, the extra fees incurred when using their services may reduce your profits.
Wealth managers provide advisory services to a wide array of high-net-worth individuals, typically those with a minimum of £100k available for investment capital. It is a discipline which incorporates structuring and planning wealth to assist in growing, preserving, and protecting the wealth of clients. Robo-advisors, another form of financial advisory, are a class of financial advisor that provide online financial advice and investment management services advice based on mathematical rules or algorithms, with minimal human intervention. They are generally used by investors with smaller levels of investment capital (typically under £100k) or small regular contributions (starting at £10 and typically less than £300 per month)
How to build an investment portfolio for beginners
Firstly, in order to build your investment portfolio, you’ll need to consider your investment objectives. You should be working to a minimum five year plan. As a starting point, your objectives could be a mix of the following:
- How much can you afford to contribute every month – or do you have a lump sum?
- What returns are you looking to generate? Remember that the higher the returns you aim for, the more risk your portfolio will be exposed to.
- What time frame are you working towards?
- Are you planning to receive income from your investments? Regular dividend paying stocks or funds will be required.
Once you have determined your investment objectives and decided whether you would like to adopt a more active or passive approach (see Part I of our series), you are ready to begin your journey to become a successful self-directed investor.
Investing all your available funds in a single company, or a number of companies with a similar set of products or services in the same sector – such as finance for example – will increase the risk to your portfolio. For this reason, adopting a sensible diversification strategy for your portfolio, by investing in a variety of asset classes across multiple geographical regions, will enable you to grow your wealth over the longer term. The table below highlights the performance of the major geographical regions around the world since 2007 to support the diversification model. Notice how the best and worst performing regions interchange each year.
Table provided by Hargreaves Lansdown. Source: Lipper IM, calendar years for IA sectors
If you decide to take a more passive approach and put your money in investment funds or exchange traded funds, it is important that you do your research on which funds suit your objectives. Websites such as Trustnet and Morningstar offer comprehensive fund prices, performance and key facts for the UK-domiciled funds market. Don’t forget to check out our Fund ideas too.
Tax efficiency – ISAs
Individual Savings Account (ISAs) are another way in which UK-based investors can begin investing in stocks and shares. An ISA is a tax-free way for UK Residents to save or invest their money through a bank, building society, stockbroker or fund supermarket. The ISA works as a wrapper, where individuals can put a range of different savings or investments inside it, all benefiting from tax-free growth. Types of ISAs include Cash ISAs, Stocks & Shares ISAs, Junior ISAs and Lifetime ISAs.
You can pay a total of GBP20,000 a year into an ISA in the 2022-23 tax year.
- You can divide your ISA allowance across the four different types of ISAs: cash, stocks and shares, innovative finance or lifetime. Although the maximum you can put into a lifetime ISA is GBP4,000 each tax year.
- You can’t put money into the same type of ISA in the same tax year, for example, two stocks and shares ISAs – you’d need to wait until the next tax year to put money into the second stocks and shares ISA.
- Your annual ISA allowance expires at the end of the tax year (5 April) and any unused allowance will be lost. It can’t be rolled over to the following year.
- You can make a lump sum investment and/or regular or ad hoc contributions throughout the tax year.
- Any increase in value of the investments in your stocks and shares ISA is free of Capital Gains Tax.
- Most income from your stocks and shares ISA is tax-free.
- You can only pay into one stocks and shares ISA in each tax year, but you can open a new ISA with a different provider each year if you want to. You don’t have to use the same provider for your cash ISA if you have one.
- It’s worth shopping around to make sure you find an ISA that suits you. Compare any charges for the ISA wrapper and the range of investments you can put inside.
Keeping up performance
Once you have started your investment journey, it is crucial to be able to maintain the performance of your portfolio. Over time, asset allocations can change as market performance alters the values of the assets. Portfolio rebalancing, which refers to the process of returning the values of a portfolio’s asset allocations to regain and maintain the original level of asset allocation, is an essential part of maintaining a high degree of diversification and therefore consistent performance levels.
Portfolios should be rebalanced regularly, at least once a year, in order to realign it with your pre-defined investment objectives. It may be tempting to tinker with your asset allocation, especially if a certain asset class or sector is performing well, but resisting this temptation will earn you higher returns and limit your losses over the long term.
You should now feel as though you are able to start investing in the stock market and a construct long-term portfolio based on your own unique investment objectives. There is no better time than the present to start investing. Sign up to The Armchair Trader’s daily newsletter for the latest stock picks on UK and international shares, funds, currencies, commodities and other alternative investment ideas.
Choosing a platform for your investment portfolio
Choosing the right stockbroker is an essential part of any successful investment strategy. Your broker will need to provide access to a wide variety of markets, especially the ones you want to trade! Most importantly, your broker should be authorised and regulated by an internationally renowned regulatory body.
Typically, investors will pay a fee to their broker for each transaction they make, whether that’s a purchase or a sale. Fees vary depending on your stockbroker and it’s important to consider how regularly you will trade shares, as each transaction will impact any profits you make from share price growth or dividends. Stockbrokers may also charge annual fees to offset their administrative fees, with some even incurring exit fees when you leave the platform. All in all, fees are a normal part of investing, but they should be competitive and not erode any profits unnecessarily.