The armchair merchant 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 like investing successfully in the stock market is something anyone can do, not something that can only be done by financial experts. Yet, year after year, financial advisors earn huge sums of money as their services continue to be in high demand. Be warned: Although established consulting services have a history of consistent returns, additional fees incurred when using their services can reduce your profits.
Wealth managers provide advisory services to a wide range of high net worth individuals, typically those with a minimum of £100,000 available for investment capital. It is a discipline that integrates wealth structuring and planning to help grow, preserve and protect clients’ wealth. Robo-advisors, another form of financial advice, are a class of financial advisors that provide online financial advice and investment management services based on mathematical rules or algorithms, with minimal human intervention. They are typically used by investors with lower levels of investment capital (usually under £100,000) or small regular contributions (from £10 and usually under £300 per month)
How to Build an Investment Portfolio for Beginners
First, in order to build your investment portfolio, you will need to consider your investment goals. You should work to a plan of at least five years. As a starting point, your goals could be a mixture of the following:
- How much can you afford to contribute each 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 do you work?
- Do you plan to receive income from your investments? Stocks or funds paying regular dividends will be needed.
Once you’ve determined your investment goals and decided whether you want to take a more active or passive approach (see Part I of our series), you’re ready to begin your journey to becoming a successful self-directed investor.
Investing all of your available funds in a single company or in several companies offering a similar set of products or services in the same industry – such as finance for example – will increase the risk to your portfolio. For this reason, adopting a judicious diversification strategy for your portfolio, by investing in a variety of asset classes in several geographical regions, will allow you to grow your wealth over the longer term. The table below highlights the performance of major geographies around the world since 2007 to support the diversification model. Notice how the best and worst performing regions trade each year.
Chart 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 into mutual funds or exchange-traded funds, it’s important that you research which funds fit your goals. Websites such as Trustnet and Morningstar offer comprehensive fund prices, performance and key facts for the UK domiciled fund market. Don’t forget to also check out our fund ideas.
Tax efficiency – ISA
Individual Savings Account (ISA) are another way for UK-based investors to start 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 like a wrapper, where individuals can put a range of different savings or investments into it, all enjoying tax-free growth. Types of ISAs include Cash ISAs, Stocks & Shares ISAs, Junior ISAs and Lifetime ISAs.
You can pay a total of £20,000 per year into an ISA in the 2022-23 tax year.
- You can split your ISA allocation between the four different types of ISAs: cash, stock and equity, innovative finance, or lifetime. Although the maximum you can invest in a lifetime ISA is £4,000 per tax year.
- You cannot invest in the same type of ISA in the same tax year, for example, two stock and equity ISAs – you will have to wait until the next tax year to invest in the second ISA of stocks and shares.
- Your annual ISA allowance expires at the end of the tax year (April 5) and any unused allowance will be forfeited. It cannot be carried over to the following year.
- You can make a lump sum investment and/or regular or one-off contributions throughout the tax year.
- Any increase in the value of investments in your shares and ISA units is exempt from capital gains tax.
- Most income from your stocks and ISA units is tax exempt.
- You can only pay for one stock and equity ISA in each tax year, but you can open a new ISA with a different provider each year if you wish. You don’t have to use the same provider for your ISA cash if you have one.
- It’s worth shopping around to make sure you find an ISA that’s right for you. Compare the fees of the ISA package and the range of investments you can put into it.
Once you’ve started your investment journey, being able to sustain your portfolio’s performance is crucial. Over time, asset allocations may change as market performance alters asset values. Portfolio rebalancing, which refers to the process of returning the values of a portfolio’s asset allocations back to and maintaining the original level of asset allocation, is an essential part of maintaining a high degree of diversification. and therefore constant levels of performance.
Portfolios should be rebalanced regularly, at least once a year, to realign them with your predefined investment objectives. It can be tempting to tinker with your asset allocation, especially if a certain asset class or sector is doing well, but resisting this temptation will earn you higher returns and limit your losses in the long run.
You should now feel confident enough to start investing in the stock market and building a long-term portfolio based on your own investment goals. There’s no better time than the present to start investing. Sign up for The Armchair Merchant daily newsletter for the latest stock picks on UK and international stocks, 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 give you access to a wide variety of markets, especially the ones you want to trade! More important again, your broker must be authorized and regulated by an internationally recognized regulatory body.
Typically, investors pay a fee to their broker for every transaction they make, whether buying or selling. Fees vary depending on your stockbroker and it is important to consider how often you will be trading shares as each trade will impact the profits you will make from the growth in the share price or dividends. Brokers may also charge annual fees to offset their administrative costs, with some even incurring exit fees when you leave the platform. Overall, fees are an integral part of investing, but they should be competitive and not unnecessarily erode profits.