How should I invest £500 a month?
Moneywise believes in helping you save money so you can focus on taking your first steps on the investment ladder. Over the long term, investing money will produce far greater returns than you'll get from high street savings accounts.
With that in mind, our "How should I invest..." column aims to help beginner investors of any age and any financial background plan for their family's future by offering hints and tips from the UK's leading independent financial advisers on how and where they should invest their cash.
In this edition, it's how to invest £500 a month.
"The best place to invest will depend on your financial objectives, circumstances and attitude to risk,"arguesPatrick Connolly of IFA Chase de Vere. "If you are investing over a short period, certainly less than five years, or if you want to avoid investment risk, then you should stay in cash. If you use a cash Isa, your returns will be tax-free. The current cash Isa annual allowance is £5,760 meaning you can invest £480 each month."
However, investing in cash is unlikely to give you the best return over the longer term, with interest rates still at historic lows." If you can take a long- term view, most people should look at a combination of pensions and stocks and shares Isas," Connolly adds.
Pensions give initial tax relief but are inflexible, whereas stocks and shares Isas can also be tax efficient and they are flexible, meaning you can get hold of your money when you want.
This is something Rebecca O'Keeffe of Interactive Investor believes, too. "While you're still contributing to your Isa, you're likely to be focusing on growth rather than income and despite the fact that the tax advantages of an Isa from a capital gains tax point of view are small, the benefit of a number of years worth of contributions is where the Isa benefits are greatest, potentially saving you hundreds, if not thousands, of pounds in further tax.
"Regular investing reduces the risk of market timing, which means that you can arguably take more risks with your underlying investment choices, including small companies and global funds. With £500 to invest a month, you can get significant diversification across three or four funds," she adds.
Investing regular monthly amounts means you can take more risk, too. If your investment falls in value, you buy at a cheaper price the following month, adds Connolly.
Darius McDermott of Chelsea Financial Services recommends splitting the investment across as many as five funds, putting £100 in each. "My preferred asset class at the moment is developed market equities," he argues. "Despite the economic challenges of the past five years, developed markets have outperformed their emerging market counterparts and I expect this to continue for the next couple of years."
For a new investor with a higher than average risk appetite, he suggests a mix of developed market equity funds that have a bias towards small and mid-cap companies. "It's always a good idea to review a portfolio at least once a year and the investor could consider switching to gain some exposure to emerging market equities in a year or two when their outlook improves."
Rebecca O'Keeffe's favourite global fund is the Baillie Gifford Global Discovery fund, whose performance "continues to impress". On the UK side, she says Standard Life Investments UK Equity Unconstrained fund and Cazenove UK Opportunities fund are both attractive options.
Low-cost tracker funds such as HSBC FTSE All Share Index, which tracks the performance of the UK stockmarket, are a good option, according to Patrick Connolly. He also rates UK funds with good quality managers such as Investec UK Special Situation or BlackRock UK Special Situations or diversified global funds such as Aberdeen World Equity or M&G Global Dividend.
"If you are nervous about having everything invested in shares, then there are a range of decent funds that will also hold other investments such as fixed interest or property alongside shares," Connolly states. "Funds to consider include Cazenove Multi Manager Diversity, Fidelity Multi Asset Strategic or Investec Cautious Managed."
Darius McDermott's picks are Marlborough UK Micro Cap Growth, Baring Europe Select, Miton US Opportunities, Jupiter Japan Income and JOHCM Asia ex Japan Small and Mid Cap. "They are a pretty racy mix, but I think the prospects for long-term growth are good.They have very experienced managers with well-resourced teams, and the investment processes have all withstood the test of time."
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Capital gains tax
If you buy an asset – shares, a second home, arts and antiques – and then sell it at a later date and make a profit, that profit could be subject to CGT. You don’t pay CGT on selling your main home (which is why MPs “flipped” theirs so regularly) or any securities sheltered in an ISA. Individuals get an annual CGT allowance (£10,600 in 2010/2011) but if you have substantial assets it’s worth paying an accountant to sort it for you.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.