Investing Basics

Here are some tips for those of you new to investing:

  1. Do build up your cash savings before you start investing. Whilst it is vitally important to save for the future, if you put all your money into investments rather than cash savings then, in the event of any emergency, you will be forced to sell your investments. It is never advisable to be in this position as you may have to sell at a low point in the stock market. A general rule of thumb is to have three months salary readily accessible, i.e. in a building society account.
  2. Where do I start? A good place to start is by using your ISA allowance (take a look at our Build your own ISA page. Whilst it might seem unlikely that you will ever face paying capital gains tax when you start with your first £50/month investment, you may well be surprised by how your investments build up over the years. Don't forget that income can be taken tax free from an ISA – that makes them a useful addition to your pension.
  3. Do think about compounding. Despite being described by Einstein as the eighth wonder of the world, it still seems that most are ignorant of its power. For example, an investor who invests £1/day for 70 years and achieves an annual rate of return of 7%. All income is reinvested and interest is compounded monthly. How much is the investor left with after 70 years. The answer is £685,245! But beware of compounding on the negative side – payday loans can destroy your wealth. Consider a £100 loan taken out today at a 5,853% interest rate compounded annually. The amount owed in just a year's time would be £5,953. If this loan went unpaid over two years the debt would grow to £354,382! So it's a good idea to pay off debt before you start to invest, as the return on investing is extremely unlikely to match most loan charges, with some exceptions.
  4. Don't worry about timing. Professional investors are unable to precisely time investing and it is imprudent to attempt it yourself (see below).
  5. Do invest monthly. This helps to iron out any market fluctuations and solves the problem of timing your investment. If the stock market falls you are able to purchase more units and within the Chelsea FundStore monthly savings receive the same discount as lump sum investments.
  6. Do build a balanced portfolio. Whilst certain regions or sectors may well outperform from time to time it is wise to hold a broadly balanced portfolio spread across various different areas/asset classes. This enables you to have some exposure to an outperforming sector and, should performance drop off, your other investments will cushion any losses. For example, those who held technology as a small portion of their portfolio (and kept it as a small part by rebalancing, i.e. as stocks spiralled higher reinvesting some of the proceeds elsewhere to keep the same percentage in technology holdings) would have benefited from, rather than been burnt by, the technology boom. Our information on Building Your Own ISA gives some thoughts on building a balanced portfolio.
  7. Do consider charges (but not too much). Charges can impact on investment performance. However, selecting a fund solely on the basis of a lower annual management or initial charge is unwise. There can be a large divergence in performance between funds and a slightly higher annual management charge can be entirely obliterated by the outperformance of a good fund management team.
  8. Do use a fund supermarket. The benefits of investing via the Chelsea FundStore are overwhelming, with free switching, income reinvested free of charge, online dealing and valuations being just a few. The FundStore enables you to have a full picture of your investments.
  9. Do consider investing in asset classes other than equities. Diversifying into fixed interest, targeted absolute return and property funds can reduce the risk in your portfolio. At times of market stress, these funds can provide some stability in your portfolio.
  10. Do only invest money that you are unlikely to need for the immediate future. If you are saving for an event which will require financing in the shorter term (i.e. 6-18 months) it is better to use a building society account rather than investing the money. You can sell your ISA at any stage but we recommend ISAs as a longer-term investment (i.e. at least five years).
  11. Do consolidate. If you have investments held outside a fund supermarket you can move them into the Chelsea FundStore, usually with no cost at all and thereby gain all of the benefits.
  12. Do strike a balance on switching. Whilst we advocate monitoring your portfolio and keeping abreast of fund manager changes, you have to be aware that excessive switching can detract from the performance of your funds. So making too many alterations to your portfolio may hinder rather than help. After all, it often turns out that last year's poor performer transforms into this year's star.