InvestmentsFeb 26 2015

Isa advice for absolute beginners

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If your client is thinking about investing in an Isa for the first time, he might feel daunted. Where does he start? What should he invest in? How is investing different from saving or gambling? These are probably just three of the most common questions novice investors may ask themselves, and which you must help them with.

Before starting out investing the client needs to set a clear goal of what he wants to achieve. Is he investing for something specific, such as retirement or his children’s school fees? Is he just looking to grow his money? Or is he looking at taking an income from his investments? Deciding what he wants will help him decide what risk he can take, and what he should invest in.

Whatever the goal, your client must bear in mind that investing is not for the short term. He should invest for at least five years, and preferably longer. Investing over the long term gives the investment time to perform and helps smooth out any swings in the stock markets.

Risk

The investor must decide how much risk he is willing to take. This is a tricky one, because attitude to risk can always change, depending on age, lifestyle and surroundings. The most straightforward test is how much risk the client can tolerate without losing sleep over concerns of an investment falling in value. The amount of risk the client should be taking also depends on what he is investing for and how long he can leave his money invested. For example, if he is in his thirties and investing for retirement he will be able to take on a fairly high risk, as the long timeframe will give him plenty of opportunity to recoup any losses. Attitude to risk is measured in how much the client is willing to lose, because he would be willing to risk more to make a greater gain. The attitude to risk will most likely change as the client becomes a more experienced investor, but he should be warned – over-confidence is rife among both experienced and inexperienced investors, and can lead to losses.

Research

Before he decides to start piling money into various funds or individual shares it is important that your client does his homework. He should read up about the different types of asset classes, the pros and cons of Isas, and different types of investment styles. The client should make notes and then sit down and consider what he wants from his investments and how each asset class and fund style fits in with his objectives. At this point, a new investor is already likely to feel overwhelmed by the sheer amount of information, and will need time to digest the information before proceeding.

Setting an asset model

Few investors actually do this, but it is a good way to manage one’s investments, maintain the attitude to risk, and identify areas from which to take profits and those which may be worth investing in. An asset model is basically the proportion of the portfolio the investor wishes to hold in any asset class, for example: 30 per cent in international equities, 40 per cent UK equities, 20 per cent bonds, 10 per cent absolute return. Your client can use this asset model as a reference point from when he first invested, allowing him to check how far his portfolio has moved.

Picking the right funds

Once he has decided which areas to invest in, your client needs to think about what types of investments he wishes to buy. Individual shares and bonds offer significant potential but the knowledge required to make a well-informed decision is beyond a novice investor. Unit trusts and Oeics offer a broader investment with the added advantage that a premium is not payable on buying the fund (unlike investment trusts, which you could pay a premium on or buy at a discount – one for more experienced investors).

There are thousands of funds out there for investors – far too many to make a comprehensive choice. Fortunately there are investment providers that have helped cut this down to a manageable number – a list of their favourite funds. This is a good place for a novice investor to start.

There are several questions to consider when picking a fund, such as: How long has the fund manager has been managing money in that sector? If the fund has a new manager, what is his track record like (as opposed to the fund’s track record)? What is the manager’s investment style – is it growth or income? When should the manager perform, and when is he likely to underperform? If he has underperformed recently, what did he do to address this? Sometimes nothing might be the right approach, but it is important he recognises the underperformance.

Find the right investment service

Of the several important factors to consider, costs, service and jargon are among the most important. Costs have a direct impact on the performance of your client’s investment, so it is critical to keep these low. Your client should make sure the platform is transparent, with a Crystal Clear pricing. He should watch out for exit fees – these are not important at the beginning but could soon trap him in the wrong service. Good customer service will also help him learn how to invest. Having the right support will be very helpful. Jargon, commonplace in the financial services industry, prevents many people from investing. Most platforms offer online services, and visiting their websites would be a good way to identify one that suits your client. Those that have clean and uncluttered websites are probably better placed to service newer investors, but the prospective investor should browse as many as he can.

Minimise tax liability

The first port of call for any investor should be to put his investments in a stocks and shares Isa. The last thing he would want to do when he has spent time building an investment portfolio is to give a chunk of it to the taxman. Taxes are just another cost to the portfolio taken out of any profit. And there are ways to legally avoid taxes. Investments held in an Isa will not incur any capital gains tax on capital growth, nor is there further tax to pay on income generated by share investments.

Your client can put a wide variety of asset classes into the Isa, including individual shares, funds and gilts (government bonds) and corporate bonds. Savers get a new Isa allowance each tax year – in the current tax year (2014/2015) they can invest up to £15,000 in an Isa.

Adrian Lowcock is head of investing of Axa Wealth

Before starting out investing in an Isa, the client needs to set a clear goal of what he wants to achieve.

Before he starts piling money into various funds or individual shares, it is important that your client does his homework.

There are thousands of funds out there for investors – far too many to make a comprehensive choice.