Investment advice

[KandtheQueens]

I am considering diversifying my investments (I currently have money in a standard ISA and premium bonds) and am interested in perhaps investing in the stock market. I would like to start small, and do not need to access my money for approximately 3 years. I tend to be risk-averse but would like to see what else is out there. Does anybody have any suggestions in terms of where to begin?

By standard ISA, do you mean cash? You can transfer that to a S&S ISA and then add to it. You’d ideally be looking at a 5 year plus time horizon, but it’s certainly a good time to get in. A very easy way to start is with something like Vanguard’s FTSE Global All Cap. You’ll be invested in the whole market, it’s passively managed so the fees are low, and about as diversified as you can get in a 100% equity fund. You can invest in that fund within an ISA or SIPP, either with Vanguard or many of the other ISA providers.

but before all that, have you an emergency fund in place, and paid off all expensive debt? If not, I’d suggest you start with something like the Rebel Finance School videos to work through it all.

@KandtheQueens I agree with the advice given by @Medee

The only thing I would add is to ask about your time horizon. 3 years is generally too short a horizon, IMO, to invest in stocks and shares. It might well turn out OK right now because the global stock market (70% of which is the US) has gone down quite a bit, but I would still not invest into stocks with money that I knew I would need in 3 years.

With money that I was confident I at least had the option to leave invested for at least 5-7 years, I would invest a decent portion into global stocks and shares.

One important question is, what about your pension? Do you have any choice how it gets invested? If you do, then you may have a greater influence over your own finances by being intentional about how your pension is invested, than by starting to invest in an ISA or other stocks and shares account. Ideally you would do both, but it is often best to start with the largest pot.

Finally regarding how to choose a specific fund or funds, I strongly agree with the suggestion by @Medee to look at a fund based on a global index such as FTSE Global All-cap. That is definitely a better-diversified index than the FTSE100, which a lot of people may think is safer because it is measured in GBP, but which has a concentration in banks, oil, metals/mining and a couple of big pharma companies.

Hi @Medee and @YankeeDad, thank you for your suggestions.

To answer a couple of questions, I do not have any debts, and have a pretty decent workplace pension (over 30% of my pre-tax pay, of which my employer pays over 20%), and I also have another workplace pension which is small but I did pay a decent amount into it for a few years, and I should have my full state pension by the time I retire, so I think I'm set pension-wise.

I do have a good one-year savings buffer in premium bonds should I need it (I don't want to touch this money as this is my safety net).

So I am looking to take a bit of risk with stocks and shares as it's something I haven't done yet. I guess the only question is one of timeframe. Do you think I would need to leave the money invested for at least 5 years to see a decent return? I do want to buy a house in 3-4 years so this fund might need to sit separately to my savings for the house deposit.

Good newson your healthy pension, but I'd echo @YankeeDad and take a good look at what it's invested in and most importantly, what the fees are. Remember to look for both the platform fee AND the fund fee. Then look at whether the fund is sufficiently diversified and not overly risk averse or geographically concentrated (eg UK specific.)

I'd be cautious about investing to have a lump to buy a house. Timing the market is very difficult, and if it takes a dip just as you need to cash it in, you'd have little flexibility. But now is probably as good a time as any to invest as it's low and markets have historically always recovered.

@KandtheQueens, nobody can know for sure when you might see a decent return. Stocks might rebound strongly next year, or they might go down and then take 10 years to recover. Investing in stocks requires you to risk the possibility of a poor return, in return for which you get the chance for a higher return than if you do not take the risk. What is different from stocks versus gambling is that at least historically, the odds are in your favour, and that is because the money is giving you fractional ownership of real companies offering products and services in a profitable way. We also know that in periods where interest rates have been less than inflation, a pool of savings was guaranteed to lose some of its real value unless it was invested in assets with higher return potential, in which case there could be a decent chance to preserve its real value.

We do know that historically, that odds of losing money were much lower if one had the ability to leave the money invested for a longer period, and we know this makes sense mathematically. I do not have the numbers at hand, and anyway history does not repeat itself perfectly, but I, personally think that the probability of ending up with less than you originally invested after 5 or 7 years is pretty low. After 3 years, low but not quite so low.

So if the money in your ISA is meant for a house deposit in 3-4 years, you may want to invest in something a bit higher return than a bank account, but less risky than stocks. That would be especially useful if you decide you actually want to buy a house sooner than planned.

With interest rates having gone up, one option could be to buy some bonds, which is a possibility in a "Stocks and Shares ISA", at least with some providers. With a bond fund you can lose money, but with actual bonds, if you choose a certain maturity and then hold the bond to maturity, you cannot permanently lose money unless the borrower defaults and fails to honour its debts. If that borrower is the UK government then I, personally, think we are unlikely to see that. Currently, you can get 4% on a government bond, so a 5 year bond will deliver something around +21-22% cumulatively over a 5 year holding period.

Sorry, just to be clearer on "cumulative return" using illustrative numbers: investing £100 today in a 5-year gilt would leave you with about £121-122 in five years, so that +21%-22% is the return in total, not per year. People talk about annual rates of return but I always find cumulative return useful.

I started buying shares on Revolut during lockdown as a mini hobby. Haven’t invested huge amounts but as the markets were so bad then I invested in some of the big companies like Amazon, Tesla etc. I did make a decent return once the markets improved.

Now my shares as expected are awful so to me this would be a great time to invest (as long as all your other finances are taken care off first) as hopefully things will improve over the next few years and a good return could be made.

But no one has a crystal ball, anything can happen and in a way what this is glorified gambling if I am honest! Although it’s making me much more interested in companies/economies and global markets so educational too!

I'm investing in a couple of different funds at Vanguard (in Australia but they are in the UK as well). They have different types, and I've chosen 4, 2 local and 2 international.

Scott Pape, the Barefoot Investor, recommends them.

Thanks all for your responses. Unfortunately I do not get to choose how my pension is invested, but I am hopeful that it'll perform okay (I am 35 so have a good 25 years of pension contributions left to make).

In terms of saving for a house, I want to continue adding to my premium bonds for the next 3-4 years for the deposit, as I like being in the draw (I won £75 this month which I'm happy with-but I'll keep an eye on this and re-think if I don't win regularly).

I want to invest in stocks and shares separately to my house deposit; I want to take a little bit more risk with that but it'll be on the basis that I will start small and add as I go. I will keep researching the Vanguard options as I have heard about those before. In terms of risk, is the global all cap the one with the highest risk?

Do any of you invest in the market directly?

The global all cap is 100% equity, but as it is so broadly diversified, it’s only as volatile as the overall market. Risk is only volatility with a fixed time horizon. Invest for long enough and that risk falls to a negligible level whereas leaving your money in cash in an inflationary environment is 100% going to losing you money.

is it a defined benefit pension? If DC, I’m surprised you can’t select the funds yourself (within the offerings of your provider.). If DC, you may be able to do a partial transfer out to optimise what it’s invested in.

I do not invest in the stock market directly.

on risk: www.alandonegan.com/blog/is-it-risky-to-invest-in-the-stock-market

@Medee, I agree with most of this. In particular I would agree that the all cap, in the long term, is less risky than a UK specific index such as the FTSE100, because you have a broader global exposure and a better long-term industry exposure.

I also agree that all cash is 100% going to lose you money in real terms in an inflationary environment, which means that even if you have more pounds due to slightly positive interest rates, you will be able to buy less with your bank balance in 10 years compared to today, if you just leave all of your money in the bank.

And, I would share your expectation that in any Defined Contribution plan, the individual probably has some discretion around how the money is invested, and it is highly important to use that discretion in order to get a suitable risk-reward profile depending on age and preferences, and also to try to minimise fees.

Where I slightly differ is on the idea that "risk is only volatility" or that it falls to a negligible level with a longer time horizon. I consider risk to be the probability of permanently losing money, measured as purchasing power (so adjusted for inflation), over the investment horizon until withdrawal of funds. Unfortunately that does not fall to zero or "negligible", no matter what you do. But, I believe that risk is definitely lowered by holding a diversified portfolio that includes a lot of equities, but not only equities. For a long time we held equities and cash because bond interest rates were too low to be attractive.

Now, for a 35 year old with no unusual circumstances, in a retirement-oriented portfolio, I think I would have something between 50 and 75 percent in equities (with that wide range going from very conservative to quite aggressive), and the rest in a mix of cash and bonds with a range of durations on the bonds - more skewed to the shorter duration end.
In a money pool intended for house purchase within 3-4 years, I might use a mix of premium bonds and shorter duration bonds. I would only own any equities if the amount were small enough that I could buy the house without using any of that money that had gone into equities, should the stock market be at a low level at the time of house purchase.

Hi OP....if youre a bookworm Id suggest reading How To Own The World by Andrew Craig....its a really good starting point for anyone new to investing....also theres some great stuff on here....https://beamoneypro.com/category/investing/

I'm watching with interest as I've got a small cash inheritance coming soon (£1.5k). I'm toying with putting it in my pension or in a s & s ISA.

Have you considered crypto??? (bracing myself for the sudden onslaught of people saying its a scam etc etc...) worth educating yourself about - in particular Bitcoin

Hi, I feel like investments etc is something you should speak to an IFA about? as i feel like their the only people who could give you proper and trusted advice on your situatiom. I work with Suttons IFA for all of my investments, im sure they would be willing to help you with it. I hope this was useful for you!

I’ve just downloaded that book on how to own the world, very useful, thank you.