Managing Your Money 

Make your first stocks & shares Isa a smart portfolio

I'm sick of shovelling my cash into savings accounts which effectively shrink its value. So this year I’ve decided to get my act together and start a stocks & shares Isa.

I will be investing around £200 a month, starting with tracker funds. Later, when I’ve got a bit more to invest, I may move onto buying investment trusts and one day, direct shares in individual companies.

One of my potential goals is to buy a house in about 5 to 10 years, but I’m still undecided on whether property will make a good investment, so I’m considering myself a long-term, adventurous investor for now, and will adjust my portfolio if I change my mind.

What’s in my first stocks & shares Isa?

40% Vanguard FTSE UK Equity Index (ISIN: GB00B59G4893)

40% Vanguard FTSE Developed World ex-UK Equity Index (ISIN: GB00B59G4Q73)

20% BlackRock Global Property Secs. Eq. Tracker (ISIN: GB00B64FQP94 )

These three tracker funds are my first ever DIY investments (I do, of course, pay into the very generously matched corporate pension my company offers, as well as taking advantage of its share save scheme, and have built up a small cash rainy-day fund). I like them because they give me exposure to a wide range of companies in the UK and around the developed world, as well as property, which will diversifies my money away from the stock market. The average annual charge for these funds is 0.35 per cent, which is very cheap considering the number of companies I'm accessing.

Picking a strategy to suit you

Making sure you’ve got a good spread of investments is a good place to start – and there are several ways to do this. A portfolio of funds is generally easier to manage than a portfolio of individual shares. It's cheaper as well. Initially I was intrigued by the idea of stock picking until I looked into the dealing costs - which at around £10 a share on average - are simply not feasible for someone investing £200 a month.

The best strategy for you depends on your financial goals and your attitude to risk. Because I'm 25 and have very long-term investment goals, I can afford to put 80 per cent of my portfolio into equities, but this style of investing won't suit everyone. I've outlined ideas on how different types of starter investors can divvy up the assets in their portfolios.

 

Starter strategies

Main aim: Buying a house in five to 10 years

Asset allocation: 50 per cent bonds, 20 per cent equity and 30 per cent property.

If you're saving for a particular goal you don't want to risk a situation where your investments are worth less than you've invested. This is more likely to happen if you invest 100 per cent in equities, so allocating a chunk of your portfolio to bonds and property could be a smart move. Consider wealth-preservation style equity funds, which are designed to protect against downside loss. Another idea is to start off with a higher allocation to equities and gradually replace them with bonds or cash as you move closer to your savings goal.

Long-term growth 10 years + portfolio (cautious):

Asset allocation: 40 per cent bonds, 40 per cent equity and 20 per cent property.

If you're a first time investor then you might not feel comfortable putting all your money in equities, even if you've got a long time horizon. Start off with an even allocation to bonds and equities - and invest mainly in larger companies and in the UK and other developed markets. An allocation to property funds will help spread your risk even further so if the stock market does suffer, you'll have at least some of your money invested elsewhere.

Long-term growth 10 years + portfolio (adventurous):

Asset allocation: 40 per cent UK equity (consider smaller companies), 50 per cent global/emerging markets equity and 10 per cent UK property.

Investors with the longest time horizon can afford to take the biggest risks. An adventurous investor could allocate most of their portfolio to equities (the most risky assets), but would need to make sure these were diversified among different world regions, company sizes and investment styles. Exposure to smaller companies and emerging markets would also ramp up the risk, while a property fund could also make a good diversifier.

Pick funds that suit your strategy

Once you've decided on your strategy, you need to choose some funds for your portfolio. The minimum you can invest in each fund is a lump sum of £500, or £50 a month if you're regular investing. Even if you've got more money to give, having too many funds is a mistake because its less cost efficient and more difficult to manage. You don't need more than about five funds to achieve a good level of diversification - I've managed to invest in a range of companies all over the world, plus a global property portfolio, in just three funds.

Here are some more options for you to choose from.

 

UK equity Funds:

Vanguard FTSE UK Equity Index (ISIN: GB00B59G4893) This passively managed fund tracks the performance of the FTSE All Share Index. It gives you exposure to large, medium and small listed companies with HSBC, BP and Vodafone as the biggest holdings. With a total expense ratio (TER) of 0.15 per cent, this is a cheap-as-chips way to get exposure to UK companies. Also consider Vanguard's range of LifeStrategy tracker funds which allow you to scale down your ratio of equities to bonds from 100 to 20 per cent. This means you can benefit from riskier equities at the beginning of your investment period and then gradually 'de-risk' the closer you get to your deadline if you're saving up for something specific like a house.

BlackRock Smaller Companies fund (ISIN: GB0006436108) This investment trust concentrates on finding smaller companies with potential to grow and make profits. It’s a highly risky strategy so you should only consider this trust for a long term investment, but the manager’s tactics have paid off in recent years. It has returned an impressive 315.8 per cent over the last five years – almost double that of the benchmark (Numis Smaller Companies plus AIM ex Investment Companies). The annual management fee of 0.73 per cent is reasonable considering the strong potential for growth, and the shares are trading on a 7.21 per cent discount which is also a bonus.

Unicorn UK Income Acc (ISIN: GB00B9XQFY62) This actively managed open ended fund aims to give investors a gross yield (the income you receive from company dividends) at least 10 per cent greater than that produced by its benchmark, the FTSE All-Share Index. In recent years it has delivered strong returns by hunting for high yields in the UK smaller company universe. Make sure you choose the accumulation “Acc” version of the fund, which automatically reinvests its dividends into buying new units.

 

Global equity funds:

Lindsell Train Investment Trust (LTI) This is an investment trust that invests all around the world, aiming to beat the MSCI World index. It's managed this consistently since 2010 with its portfolio which is relatively concentrated for a global fund - at between eight and 25 holdings. The manager, Nick Train, is very highly regarded and likes to invest in well-known consumer brands. The trust also holds a 25 per cent stake in its parent fund management company, Lindsell Train. Its TER is 1.26 per cent.

Vanguard FTSE Developed World ex-UK Equity Index (ISIN: GB00B59G4Q73) This passively managed tracker fund aims to track the FTSE Developed World ex-UK Index, which is a good way to diversify if you’ve already got a lot of UK exposure in your portfolio and don't want to overlap. It has a low TER of 0.3 per cent.

Lazard Global Equity Income (ISIN: GB00B24DPX62) This open ended fund invests in companies which pay high dividends so it can generate healthy income as well as growth. By selecting the accumulation “Acc” version you can funnel this straight back into your portfolio to grow your money. The yield is a healthy 5.25 per cent. Within its portfolio the trust has exposure to emerging markets – but it scales this according to the market conditions. Its benchmark is a blend of the MSCI World and MSCI Emerging Markets indices. The TER is 1.55 per cent.

 

Emerging market equity funds:

JPMorgan Emerging Markets Income (JEMI) This investment trust offers access to dividend-paying stocks in the MSCI Emerging Markets index. Its performance has been strong in recent years and it has an impressive 4.74 per cent yield. Because there are no accumulation options with investment trusts, you’ll need to check to see whether the platform you’ve selected offers free/automatic dividend reinvestment before you buy. The shares are currently trading on a small 1.83 per cent premium but this shouldn’t put you off. The TER is 1.21 per cent.

Templeton Emerging Markets (TEM) This investment trust aims to beat the MSCI Emerging Markets index. It’s posted stellar long-term performance for investors in recent years and is managed by Dr Mark Mobius, one of the pioneers of emerging markets investing. He tries to achieve long-term capital appreciation by buying companies operating in emerging markets or stocks listed on the stock markets of such countries. It's currently on a 9.14 per cent discount and has a 1.31 per cent TER.

BlackRock Emerging Markets Eq Tracker Fund (ISIN: GB00B65W2626) This passive fund aims to track closely the performance of the FTSE All World Emerging Index, by investing in companies in the Index. It invests directly into constituent companies, as well as via other transferable securities (such as derivatives) to get exposure to such companies. Bear in mind that actively managed emerging markets have a big advantage over the index because it’s easier for fund managers to add value by stock picking in less developed countries. But if you’re trying to keep costs down, at 0.62 per cent, the TER is a snip of the cost of the actively managed funds investing in emerging markets.

 

Property funds:

Ignis UK Property Fund (ISIN: GB00B053C414) This is a unit trust investing mainly in UK commercial real estate. The fund has reasonable diversification across 64 holdings and under a third of the fund invested in the top 10 holdings, so giving you a good spread. It pays a nice 3.67 per cent yield and has an ongoing charge of 1.52 per cent.

TR Property Investment Trust (TRY) This investment trust is a UK-based investment company that’s listed on the FTSE 250 index. It invests in a diversified portfolio of Pan European equities as well as UK direct property on behalf of its shareholders, so could be a good option if you’re trying to diversify your portfolio away from the UK. It is trading on a small discount of 1.18 per cent and has a reasonable 0.99 per cent ongoing charge.

BlackRock Global Property Secs. Eq. Tracker ( ISIN: GB00B64FQP94 ) This tracker fund aims to track the FTSE EPRA/NAREIT Global Real Estate Series Developed Index, which is compromised of stock-market listed property companies. Unlike the investment trusts you can use to invest in property, this fund doesn’t invest directly in bricks and mortar. Instead it holds around 300 property companies from around the developed world. Before you buy this fund, note that funds which buy property this way move up and down with stock market, so can be more volatile in the short term. It has an ongoing charge of 0.6 per cent so is a cheap option, but make sure you buy it for a long term investment only.

 

Bond funds:

TwentyFour Dynamic Bond fund (GB00B5LHHR01) This unit trust is more nimble and diversified than traditional bond funds. The manager is able to shorten the average duration of bonds which is a way of minimising volatility – a useful tool if you’re trying to cautiously grow your money. It's returned 9.94 per cent over the past year and is currently paying a 6.4 per cent yield. The TER is reasonable at 1.36 per cent.

BlackRock Corporate Bond fund (ISIN: GB00B5MMQ552) This tracker fund gives you cheap exposure to the global corporate bond market. It invests a lot of assets which are denominated in other currencies, which means changes in the relevant exchange rate will affect the value of the investment. The fund buys fixed interest securities such as corporate or government bonds which pay a fixed or variable rate of interest (also known as the ‘coupon’) and behave similarly to a loan. The TER is 0.2 per cent.

Legal & General Dynamic Bond Trust (ISIN: GB00B1TWMM97) This investment trust aims to provide a combination of income and growth and invests between 80 per cent and 100 per cent in bonds and/or derivatives and/or cash. The bonds that the fund invests in may be investment-grade (rated as lower risk) or sub-investment-grade (rated as higher risk). The bonds held may be issued by companies or governments and may be issued in the UK or overseas – giving you a broad range of exposure – without having to worry about formulating the strategy yourself. The TER is reasonable at 1.42 and the annual yield is impressive at 5.3 per cent.

 

Now choose the best Isa for you

You next need to choose a platform via which to buy these funds for your Isa. We used platforum.com to find the cheapest for investors with relatively small amounts of money to invest:

Lump sum of £5760 invested in funds

Cheapest: Charles Stanley Direct (£14.40 a year) AXA Self Investor, TD Direct Investing, Fidelity (all £20.16 in first year).

Most expensive: Alliance Trust Savings (£115.00 in year 1), Interactive Investor (£80.00 in first year).

Lump sum of £5760 invested 50/50 in funds and shares

Cheapest: Charles Stanley Direct (£34.40 in year 1) TD Direct (£35.08) AJ Bell You Invest (£35.56 in first year).

Most expensive: Alliance Trust Savings (£140.00 in year 1), Barclays Stockbrokers (£94.00 in first year).

Regular investing in funds (£200 a month)

Cheapest: Charles Stanley (£3.00 in year 1) AXA Self Investor, Fidelity, rplan, TD Direct Investing (all £4.20 in first year).

Most expensive: Alliance Trust Savings (£108.00 in year 1), Interactive Investor (£80.00 in first year).

Regular investing 50/50 funds & shares (£200 a month)

Cheapest: TD Direct Investing(£20.16 in year 1) Hargreaves Lansdown (£23.40 in first year).

Most expensive: Strawberry (£195) Barclays (£21.40).

My pick: Hargreaves Lansdown. While Charles Stanley would have been the cheapest broker for funds, it would become expensive if I wanted to buy investment trusts and shares as it charges £10 per trade. I also considered AJ Bell YouInvest and opened an account with TD Direct, but I then closed it after experiencing frustrating technical faults as well as poor customer service.

Platform charges for first-time investors

Platform£5,760 in funds£5,760 in funds and shares£200 per month regular investing in funds£200 a month 50/50 funds & investment trustsRegular investing notes
TD Direct Investing£20.16£35.08£4.20£20.10No charge for fund transactions. £1.50 regular investing charge for shares.
Hargreaves Lansdown£25.92£49.82£5.40£23.40No charge for fund transactions. £1.50 regular investing charge for shares.
AJ Bell Youinvest£21.42£35.56£20.40£37.20£1.50 regular investing charge
Halifax Share Dealing£37.50£62.50£36.50£60.50£2.00 regular investment charge
Interactive Investor£80.00£80.00£80.00£80.00£1.50 regular investing charge
The Share Centre£72.60£87.60£69.60£81.600.5% regular investment charge (min £1)
Bestinvest£23.04£38.04£4.80£94.80No charge for fund transactions
Charles Stanley Direct£14.40£34.40£3.00£121.50No charge for fund transactions
Alliance Trust Savings£115.00£140.00£108.00£126.00£1.50 regular investing charge
Strawberry£45.00£70.00£45.00£195.00No charge for fund transactions
Barclays Stockbrokers£35.00£94.90£35.00£214.40No charge for fund transactions. Minimum £35 account charge.
AXA Self Investor£20.16N/A£4.20No ITsNo charge for fund transactions. Shares not available.
Chelsea FS£34.56N/A£7.20No ITsNo charge for fund transactions. Shares not available.
Fidelity£20.16N/A£4.20No ITsNo charge for fund transactions
rplan£20.16N/A£4.20No ITsNo charge for fund transactions. £1.50 regular investing charge for shares.
Willis Owen£42.05N/A£8.76No ITsNo charge for fund transactions. Shares not available.

Source: The Platforum

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