What should I consider when setting up my investment accounts? I am still attending university, but given all the news I want to start now
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I believe my options are cash, stocks, and shares ISA. Anything else? I have just turned 20, but I want to start saving as soon as possible.
poshjosh
2 years ago
Expert Financial Adviser Answer
James Brooke
answered 2 years ago
I'll come onto the question of the options you have available in a moment.
Firstly, at the highest level, your decisions will depend on your Investment Philosophy i.e. what you believe about investing and investment markets.
You will need to consider what it is that you want to invest for. What are your objectives or the outcomes of the investment that you want? Are you investing for a house deposit or for your retirement, or something else?
Timescale and your capacity for risk will change depending on the purpose for which you are investing. For example, saving for a house deposit is much shorter term than saving for retirement.
Also, you have much more capacity for risk when saving for retirement than you do with a house deposit, because you have much more time to recover from a bad investment outcome by, for example, delaying when you retirement or accepting a lower income in retirement.
If your house deposit fund drops by say 40%, due to poor market conditions, and you had planned on using the money next month then you have a major problem.
Whilst your capacity for risk will vary depending on the goal, your attitude to risk is likely to remain pretty constant.
As far as options are concerned, you will need to consider which asset classes to invest in and how you wish to hold the investments, which means what tax wrapper, such as an ISA, you will choose, if any.
The 5 broad asset classes to consider are Cash, Fixed Income (Gilts, Treasuries and Bonds), Equities (Stocks and Shares), Property (commercial and residential), Commodities, and Alternatives. As a result of your investment philosophy you may decide that some of these asset classes such as physical commodities are not investable asset classes.
The main options for how to hold the investments are either directly or in an ISA, an Off Shore Bond, an On Shore Bond, a Pension or a Qualifying Savings Plan.
Control the things you can control and don't worry about the rest. for example you can control the costs associated with the investment. The lower the better.
There are no tried and tested, proven systems of predicting which active managers are going to beat the market or their benchmark next week, or month, or year, so don't try to pick managers. Just capture the market return as cheaply as you can and then stick with the program.
You will probalby want to have a written Investment Policy Statement, so that you know what you are going to do in different circumstances and you don't get swayed or blown off track by hype, or the latest fad, or emotions.
I hope that helps, but I am sure you will benefit from some individual advice and guidance.
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Firstly, at the highest level, your decisions will depend on your Investment Philosophy i.e. what you believe about investing and investment markets.
You will need to consider what it is that you want to invest for. What are your objectives or the outcomes of the investment that you want? Are you investing for a house deposit or for your retirement, or something else?
Timescale and your capacity for risk will change depending on the purpose for which you are investing. For example, saving for a house deposit is much shorter term than saving for retirement.
Also, you have much more capacity for risk when saving for retirement than you do with a house deposit, because you have much more time to recover from a bad investment outcome by, for example, delaying when you retirement or accepting a lower income in retirement.
If your house deposit fund drops by say 40%, due to poor market conditions, and you had planned on using the money next month then you have a major problem.
Whilst your capacity for risk will vary depending on the goal, your attitude to risk is likely to remain pretty constant.
As far as options are concerned, you will need to consider which asset classes to invest in and how you wish to hold the investments, which means what tax wrapper, such as an ISA, you will choose, if any.
The 5 broad asset classes to consider are Cash, Fixed Income (Gilts, Treasuries and Bonds), Equities (Stocks and Shares), Property (commercial and residential), Commodities, and Alternatives. As a result of your investment philosophy you may decide that some of these asset classes such as physical commodities are not investable asset classes.
The main options for how to hold the investments are either directly or in an ISA, an Off Shore Bond, an On Shore Bond, a Pension or a Qualifying Savings Plan.
Control the things you can control and don't worry about the rest. for example you can control the costs associated with the investment. The lower the better.
There are no tried and tested, proven systems of predicting which active managers are going to beat the market or their benchmark next week, or month, or year, so don't try to pick managers. Just capture the market return as cheaply as you can and then stick with the program.
You will probalby want to have a written Investment Policy Statement, so that you know what you are going to do in different circumstances and you don't get swayed or blown off track by hype, or the latest fad, or emotions.
I hope that helps, but I am sure you will benefit from some individual advice and guidance.
poshjosh
answered 2 years ago
I am interested in accumulating wealth. Since I'm only 20 my goal is to take as much risk as possible to generate capital appreciation for when I retire. I'm single, no children, and no plans to get married anytime soon.
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Expert Financial Adviser Answer
James Brooke
answered 2 years ago
The historical risk (standard deviation) and real (above inflation) return figures for each of the asset classes (since 1955 and derived from the data sources shown in brackets, unless otherwise stated) are as follows:
Cash (UK 91 Day T-Bills) risk 3.13% return 1.80%
UK Fixed Income (UK 5 Year Bonds) 3.25% 3.64%
Global Fixed Income (JP Morgan Global Gov't Bond) 13.09% 3.52%
Global Property (Citi Global Property since 1990) 27.96% 2.97%
UK Equity (MSCI UK) 28.66% 6.37%
UK Small Cap Equity (MSCI UK Small Cap) 30.08% 9.44%
Global Equity (MSCI World) 20.98% 4.60%
Emerging Markets (MSCI Emerging since 1993) 35.97% 10.97%
Alternatives (C.S. Tremont Hedge Fund Index since 1994) 11.30% 6.79%
Sorry I couldn’t insert this as a table.
From this you can see that long term equities have outperformed fixed income and property by quite a margin. You need to be aware that the shorter term data for Property, Emerging markets and Alternatives mean that these figures are arguably less reliable than the longer term figures.
You do not say if you wish to be involved in rebalancing your portfolio to a selected asset allocation over time or if you just want to let it run. If you are investing on a regular monthly basis then Pound Cost averaging will work in your favour and you will probably be fine to just let it run. If you are investing a lump sum then you will need to look to rebalance to your chosen asset allocation when the portfolio gets sufficiently out of kilter (+ or - say 15% to 20% from norm) or on a yearly basis, which ever come first.
I would suggest that an asset allocation of between 75% and 100% equities and 25% to 0% fixed income might suit you. Indeed in their recent book 'The elements of Investing' by Burton Malkiel and Charles Ellis, Burton recommends 75%-90% in equities and 25% to 10% in fixed income and Charles recommends 100% equities for those in their 20s and 30s.
Don't try and pick active managers, just go for low cost trackers, such as those offered by L&G, HSBC, Vanguard, Dimensional, and others. I would suggest that you invest via a fund supermarket such as FundsNetwork or Co-Funds. Speak to an Independent Financial Adviser for more information.
Dont forget to use the relevant tax wrapper, as mentione previously. I would suggest using an ISA at this stage as you then have access to the money if you need it for wedding, children etc. You can always take the money out of the ISA to pay into a pension and get the tax relief later if that seems to be the better option.
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Cash (UK 91 Day T-Bills) risk 3.13% return 1.80%
UK Fixed Income (UK 5 Year Bonds) 3.25% 3.64%
Global Fixed Income (JP Morgan Global Gov't Bond) 13.09% 3.52%
Global Property (Citi Global Property since 1990) 27.96% 2.97%
UK Equity (MSCI UK) 28.66% 6.37%
UK Small Cap Equity (MSCI UK Small Cap) 30.08% 9.44%
Global Equity (MSCI World) 20.98% 4.60%
Emerging Markets (MSCI Emerging since 1993) 35.97% 10.97%
Alternatives (C.S. Tremont Hedge Fund Index since 1994) 11.30% 6.79%
Sorry I couldn’t insert this as a table.
From this you can see that long term equities have outperformed fixed income and property by quite a margin. You need to be aware that the shorter term data for Property, Emerging markets and Alternatives mean that these figures are arguably less reliable than the longer term figures.
You do not say if you wish to be involved in rebalancing your portfolio to a selected asset allocation over time or if you just want to let it run. If you are investing on a regular monthly basis then Pound Cost averaging will work in your favour and you will probably be fine to just let it run. If you are investing a lump sum then you will need to look to rebalance to your chosen asset allocation when the portfolio gets sufficiently out of kilter (+ or - say 15% to 20% from norm) or on a yearly basis, which ever come first.
I would suggest that an asset allocation of between 75% and 100% equities and 25% to 0% fixed income might suit you. Indeed in their recent book 'The elements of Investing' by Burton Malkiel and Charles Ellis, Burton recommends 75%-90% in equities and 25% to 10% in fixed income and Charles recommends 100% equities for those in their 20s and 30s.
Don't try and pick active managers, just go for low cost trackers, such as those offered by L&G, HSBC, Vanguard, Dimensional, and others. I would suggest that you invest via a fund supermarket such as FundsNetwork or Co-Funds. Speak to an Independent Financial Adviser for more information.
Dont forget to use the relevant tax wrapper, as mentione previously. I would suggest using an ISA at this stage as you then have access to the money if you need it for wedding, children etc. You can always take the money out of the ISA to pay into a pension and get the tax relief later if that seems to be the better option.
