With £50 a month to invest, our reader asks about the cost of not putting all his eggs in one basket
I have £50 a month to invest in a Stocks & Shares Isa. Should I put all my money into one fund or should I invest across lots of different funds? Will it cost me more to buy a selection?
Investing on a regular basis can make saving more manageable, and by drip-feeding money into the stock market you do not risk buying at its peak and suffering a large fall.
You are also right to recognise the importance of diversification – not putting all your eggs in one basket when you invest.
“To reduce risk, you need to invest across different asset classes, and be geographically diverse too,” says Hannah Owen, financial planner at private client adviser Quilter. “If you don’t, you leave yourself open to concentration risk.”
One way to achieve a diversified portfolio is to invest in a single fund that is well diversified.
Adrian Lowcock, head of personal investing at Willis Owen, recommends starting out with a single fund that invests globally either in equities or through a multi-asset approach.
“Start small with a core fund, from which you can build your portfolio over time,” he says. “This allows you to analyse how it’s performing and what affects its value.”
He recommends Artemis Global Select, which looks for quality companies that are trading at attractive valuations, and Fidelity Index World, a low-cost index-tracker with an annual charge of just 0.13%, which is on Moneywise’s list of First 50 Funds for Beginners.
Also on the list are three Vanguard LifeStrategy funds, which are cheap, readymade, globally diversified passive funds. Each is created with between 6,000 and around 20,000 underlying holdings and they are regularly rebalanced.
As your investment knowledge and the size of your investment pot grow, Mr Lowcock says you might want to consider investing in more funds.
“Once you have at least £500 in your fund, you could add a few complementary funds to further diversify your portfolio,” he explains.
These could be more focused funds, concentrating on a particular asset, country, region or management style. For instance, Mr Lowcock suggests JO Hambro UK Equity Income, which focuses on the UK with a bias towards smaller companies.
Treatment costs and side-effects
Whether you invest in one fund or a selection, you need to consider fees, though this won’t depend on the number of funds you hold.
“Funds charge a percentage of your investment so it won’t cost you any more to hold multiple funds,” says Mr Lowcock.
But be careful if you’re planning to buy and sell funds regularly.
“Some investment providers and platforms levy a trading charge every time you buy a fund,” warns Miss Owen. “If you want to hold lots of funds, weigh up the trading costs of different providers first.”
You will need to rebalance your portfolio at least once a year to ensure the weightings remain the same if you hold a lot of funds – so, for example, your exposure to a specific asset class or region. As funds grow at different rates, this can greatly alter the level of risk across your portfolio.
One way to avoid rebalancing is to start with a multi-manager or fund of funds investment. These are funds that invest in other funds, giving you diversification in management styles.
Miss Owen explains: “The manager is responsible for selecting fund managers who invest in more specialised areas. They will also ensure that the underlying assets stay in line with the fund’s stated level of risk.”
There are many multi-manager funds, and Miss Owen recommends Aberdeen Standard Myfolio Multi-manager, BMO Multi-manager Navigator risk-profiled funds, and Cirilium Active, with five funds rated from conservative to adventurous.
Also consider a wealth manager’s model portfolio. “A model portfolio invests globally across a wide range of sectors with the manager ensuring the level of risk remains in line with objectives,” explains Richard Morley, senior investment manager at wealth management firm Brewin Dolphin.
“Plenty of investment firms offer propositions designed for regular savers, so don’t be reluctant to speak to a wealth adviser before doing anything.”
Sam Barrett writes for Money Observer, FTAdviser.com and Insurance Post