Most investors hold a mix of assets under different “wrappers,” like self-invested personal pensions (Sipp), or individual savings accounts (Isa). Both have tax benefits that you should take advantage of. RDR will not affect the way that these wrappers work.
On top of stocks and shares, you can also hold securities including exchange-traded funds (ETFs) and tracker-funds, which track various indices and asset classes, offering a diversified, low-cost way to invest.
However, Sipps are not short-term investments, and you should not tie-up money that you may need in the near future. Sipps do not allow you to make withdrawals until you are 55 years old. Isa withdrawals are usually (but not always) easy – but of course stocks and shares fluctuate severly so are often long-term investments.
IN THE TOOLBOX
Greater choice may overwhelm some people, which is why some companies offer free research and online tools to assist you in finding suitable investments.
“Understanding your risk tolerance is a good starting point,” says Rebecca O’Keeffe of Interactive Investor. Her company has an online questionnaire that helps to define your attitude towards risk, and then suggests investments that match your profile.
Before you invest, it is also important to grasp how a particular fund works. Using Morningstar’s free research reports, you can understand what a fund does beneath its bonnet. The company also ranks funds by performance, and assigns each fund its own risk rating.
One can build a portfolio based on virtually any investment objective. Most advisers recommend you invest in a broad range of asset classes, which will diversify your portfolio and reduce its volatility.
Inexperienced investors may not feel confident about screening funds themselves. If you fall into this category, you needn’t worry. Some companies offer model portfolios that are based on different investment objectives to guide you.
One tool from Selftrade suggests a range of different portfolios, incorporating different mixes of shares, bonds and property funds, as well as alternative investments. “These models are based on three broad objectives: income, growth, and a balanced approach, and they suggest the percentage of investments you might hold in each asset class,” says David Jeal of Selftrade.
A recent survey by Rplan and YouGov found that 49 per cent of investors do not know how their portfolio performed in the last year. So once you have built your portfolio, it is important to track its performance, ensuring that it continues to meet your objectives. Rplan has tools that let you monitor performance, and even makes suggestions on where to improve.
It is important to keep the cost of investing to a minimum, says Nick Curry of Rplan. Constant trading in individual shares can add up, typically around £10 per transaction. Some funds also have expensive management charges. Costs can eat into returns, so tools like Rplan’s portfolio analysis utility help you to monitor and compare the costs of different investments, ensuring that you get more value for your money.
A GUIDING STAR
While tools can be extremely useful, they only offer guidance, not specific advice based on your individual circumstances. One shortfall is that they do not consider your tax liabilities, or give advice on how to mitigate it. If you want a bespoke portfolio with specific advice about tax, seeking advice is recommended.
Many critics of RDR are concerned about its potential impact on retail investment. However, there are some positives: RDR will increase transparency and choice. Naturally, this may be intimidating to inexperienced investors. But these investors still have an abundance of resources at their disposal, all offering them guidance to make appropriate choices.