How should I invest £50 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 £50 a month.
According to Patrick Connolly, head of communications at Chase de Vere, where you should invest depends on why you are investing, over how long and the amount of risk you are willing to take.
If you are investing over a short time period, such as less than five years, then you should stick to cash. You should look to make regular premiums into a cash ISA, where all interest will be tax-free.
Justin Modray, founder of Candid Money, agrees but says the golden rule is the same however much you invest: make sure you don't bite off more risk than you can chew.
"If you can invest for five to 10 years or more and sleep soundly through potential downturns along the way, then the stockmarket is generally a good place to start for long-term investing," he says. "An added potential advantage of monthly investing is that it helps smooth the ups and downs of markets."
He says beginner investors with £50 a month should opt for a single fund, and consider switching future contributions into another fund once they have built up a reasonable amount of money.
For investors who don't mind the risk of investing in shares rather than funds, Modray recommends they choose a stockbroker with discounted monthly dealing, or otherwise dealing fees could wipe out a significant chunk of each £50 invested.
Peter Chadborn, director of Plan Money, says the easiest mistake an inexperienced investor can make is to chase high performance without understanding the degree of risk they are taking in doing so.
"Investment companies will naturally boast of the impressive performance of a flagship fund but unless the investor has understood the way a fund is managed and what assets it invests in, they could be in for a bumpier ride than they would instinctively be comfortable with," he explains.
"A good low-cost option is a UK tracker fund that will give broad exposure to the UK stockmarket," Patrick Connolly says. He recommends the HSBC FTSE All Share Index fund.
For those who want to adopt a more cautious approach and don't want all of their money going into shares, then Connolly rates Cazenove Multi Manager Diversity fund.
"This fund spreads risks by investing one-third into shares, one-third into fixed interest and one-third into other investments such as property or commodities."
For those who are happy to take greater risk, then exposure to more volatile areas such as emerging markets can be considered. "These have the potential to perform very well over the long term," adds Connolly. "A good choice is the JPM Emerging Markets fund."
Justin Modray agrees: "If you'd rather focus on more adventurous areas such as emerging markets, then an actively managed fund might better suit your needs – for example, the JPM Emerging Markets fund. Buying funds via a discount broker is likely to be the cheapest option."
Modray says a simple way to start investing is using a low-cost tracker fund such as the HSBC FTSE All Share Index tracker. "It gives you mainstream UK stockmarket exposure for just 0.27% a year, versus around 0.75% or more for an actively managed fund.
Peter Chadborn recommends a fund with a cautious objective for someone starting out with just £50 a month: "New investors may also not appreciate other important factors such as the management methodology, the range of asset classes and geographical reach of the fund. We therefore like multi-asset funds, where the fund has a very broad mandate which effectively removes the strategy and market-timing decision-making from the investor.
"We require a management team that is well established and well respected and, of course, has good consistent past performance.To meet these criteria, I would suggest the F&C Navigator Distribution fund."
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.
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.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.