How should I invest £100 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 investment professionals on how and where they should invest their cash.
In this edition, it's how to invest £100 a month.
As with any investment - no matter how big or small, whether you plan to plough your money into a fund all at once or with regular investments - the best place to invest will depend on your financial objectives, circumstances and attitude to risk. So says Patrick Connolly, a chartered financial planner at 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," he says. "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 up to £480 each month."
Darius McDermott, managing director of Chelsea Financial Services, adds:"Investing just £100 a month into an Isa can really add up: over 40 years, assuming 5% growth a year, after charges, you could have a pot of money worth more than £150,000. So it's well worth doing."
Connolly points out investing in cash is unlikely to give you the best return – particularly over the longer term.
If you can take a longer-term view, you could look at a combination of pensions and stocks and shares Isas, he advises. "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. If you need flexibility you should put most focus on Isas."
Those with a medium appetite for risk and who can invest for at least five years could consider a low-cost tracker fund. "Rather than a fund manager choosing investments, a tracker fund buys all the companies in an index such as the FTSE 100," says Adam Laird, passive investment manager at Hargreaves Lansdown. "This reduces the risk that the manager might substantially underperform."
As no active management takes place, they're cheaper too. "Many are available with annual charges between 0.1% and 0.3% - over the long term the compounded difference between 0.3% and 1% over 10 years is substantial," he adds.
For investors with a more aggressive appetite for risk, or long investment timescale, McDermott says they could choose an emerging market fund "as regular monthly investments will take out some of the volatility and over the very long-term, these markets should be rewarding".
By investing regular monthly amounts you can take more risk because if your investment falls in value you simply buy at a cheaper price the following month. But McDermott sounds a note of caution: "When you first start investing £100 a month, don't over-diversify – one or two funds is more than enough to begin with."
For anyone thinking of investing in shares for the first time, Patrick Connolly says a good option is a low-cost tracker fund, such as HSBC FTSE All Share Index, which tracks the performance of the UK stockmarket.
Alternatively, he suggests they consider UK funds with good quality managers such as Investec UK Special Situations or BlackRock UK Special Situations. Or they could look at diversified global funds such as Aberdeen World Equity or M&G Global Dividend.
For more diversified funds, he recommends Cazenove Multi Manager Diversity, AXA Framlington Managed Balanced and Investec Cautious Managed.
For medium-risk investors, investing for at least five years,Adam Laird suggests the Vanguard LifeStrategy 80% Equity mix fund. It is a passively managed, mixed asset fund, with a fixed 80% in equities and bonds. "This fund is for investors with a long time horizon, but with increasing bond exposure for the more risk averse," he says.
For anyone with a high appetite for risk or long investment horizon, Darius McDermott likes the M&G Global Emerging Markets fund. "The manager has a consistent track record and is a value investor, and value styles rather than growth tend to outperform in emerging markets."
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.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
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.