If your new year’s resolution is to make your money work harder in 2024, one way to achieve it is by investing in the stock market.
The sooner you start, the better. This is because a long period in the markets will allow you to make the most of “compound” returns – gains on your gains. Someone who invested £2,000 annually for 40 years would end up with a pot worth £256,000, assuming average returns of 5pc a year, whereas someone who invested over three decades would have £142,000.
Once you have decided to give investing a go, the first question is: what do you want to invest in? You may find you enjoy the research that picking individual shares requires. But keeping track of companies’ changing prospects can be extremely time-consuming.
If it is your very first time investing, you are probably better off keeping things simple. With collective investments such as funds, you can leave the hassle of choosing stocks to a professional, with the added advantage of reducing risk by having your money invested across a wide range of companies.
The next thing to think about is how much risk you want to take. Generally, the younger you are, the more risk you can afford to take. Rob Burgeman of the wealth manager RBC Brewin Dolphin said: “If you are relatively young and have a decent length of time over which to invest, stocks have consistently provided the best returns, albeit the most volatile ones.”
But even when you have made these key decisions, the huge choice of investments out there can be overwhelming. So we asked some investment experts which funds they would recommend for first-time investors.
The best one-stop funds for first-timers
Building a sufficiently diversified portfolio is one of the most intimidating aspects of investing as a beginner. This is where a so-called “one-stop fund” can help.
By giving you exposure to major companies from around the world, these funds can serve as the core holding of your portfolio, or even the sole component while you find your feet.
If you are happy to have the bulk of your portfolio in the stock market, an “index tracker” – which simply owns every stock in an index (such as the FTSE 100) and makes no attempt to pick winners and avoid losers – may be your best port of call.
Fidelity World Index fund
This index tracker aims to replicate the performance of the MSCI World Index, which is composed of more than 1,500 large and medium-sized companies from all over the world. With an annual cost of 0.12pc, it is a cheap way to access the global stock market.
JP Morgan Global Research Enhanced Index fund
The disadvantage of index trackers is that they cannot outperform the benchmark they track. For those who want a little more active management, the JP Morgan Global Research Enhanced Index Fund is built in reference to the MSCI World Index but adds in-house research on sectors and companies.
This means it puts more money into the stocks that JP Morgan’s analysts expect to outperform and less into the ones they think are overvalued.
At 0.35pc a year it is “a little more expensive” than the Fidelity World Index fund, said Mr Burgeman. “But the fund has added value over the longer term, outperforming the MSCI World Index by around half a percentage point a year since launch,” he added.
Such a small-seeming extra return can make a big difference if repeated over the decades.
Vanguard LifeStrategy range
The LifeStrategy funds spread your money across a variety of Vanguard trackers, giving you exposure to thousands of stocks and bonds from around the world, and are a common investment for first-timers.
The LifeStrategy 80pc Equity fund, for example, which has 80pc of its money in stocks and the rest in bonds, holds more than £10bn of investors’ money.
The funds have become extremely popular thanks in part to their low cost and simplicity. The annual cost is just 0.22pc, yet, unlike some other funds, the portfolios are “rebalanced” to maintain the stated proportion of stocks and bonds. If you have a long time horizon, opting for 80pc or 100pc exposure to the stock market is probably wise.
The best portfolio for beginners
If investing in one fund seems a little too boring, you may want to build a portfolio yourself.
Dan Boardman-Weston of BRI Wealth Management said the following funds should make suitable building blocks for a first-timer’s portfolio: Liontrust Special Situations, HSBC FTSE All World Index, Gravis UK Listed Property, Polar Capital Global Technology and iShares Emerging Markets Equity Index.
Liontrust Special Situations, run by long-serving manager Anthony Cross and his colleagues Julian Fosh and Victoria Stevens, gives investors exposure to small, medium-sized and large companies in Britain, while Gravis UK Listed Property invests in real estate investment trusts (Reits).
“Property has performed well over the long term and the Gravis fund is ideally placed to deliver good returns over the longer term,” Mr Boardman-Weston said.
However, these funds alone will leave you highly exposed to Britain and you will need some global stocks to balance them. This is why you may want to add funds such as HSBC FTSE All World Index and the iShares Emerging Markets Equity Index. Together these will give you access to some of the largest companies in the world while keeping costs low.
Mr Boardman-Weston also recommended the Polar Capital Global Technology fund thanks to its focus on one of the fastest-growing sectors of the past decade.
This should give you a flavour of how to build your own portfolio. You may decide that you want less exposure to Britain or that another sector interests you more than technology. The key is spreading your risk across different markets so that if one underperforms you have some protection from the fallout.
Tips for investing as a beginner
Before you do anything else, check that you have enough money in an emergency fund. Generally it is advised to keep at least three to six months’ salary in an easy-access account to cover any unexpected costs, for example in case you lose your job.
You should be prepared to tie up the money in your investment portfolio for at least five years, to give yourself the best chance of riding out volatility in the market. If you are saving for a goal in the very near future, it is better to keep the money you’ll need in cash.
Make the most of tax-free “wrappers” such as individual savings accounts (Isas) and self-invested personal pensions (Sipps). Which tax-free vehicle you should choose depends on whether you are saving for retirement or for a shorter-term goal.
Mr Burgeman said: “Investing in a pension can boost the value of the investment with generous tax relief, but may make it inaccessible without large penalties before retirement. Lifetime Isas can also provide a boost, but access can, again, be restrictive.”
A stocks and shares Isa is probably the most appropriate type of account if you want easy access to the money in your portfolio. You can save up to £20,000 a year into Isas and from April you can open more than one of the same type.
Above all, remember to keep a cool head. “Try to take emotions out of investing and set up regular amounts that will be invested for you.
“‘Timing the market’ is notoriously tricky and your emotions can be your own worst enemy when investing,” Mr Boardman-Weston said.
How to invest like a pro in 2024