About six months ago I made a decision that has permanently changed the way I manage my money. I became so sick of shovelling my cash into a cash Isa with a tiny interest rate, that I opened my first stocks & shares Isa, swapping saving for regular investing.
The initial process was tedious and frustrating. I spent hours selecting a DIY broker but defected to a different broker within days because I found it unusable. Picking my funds from an ocean of garbage investments also gave me a headache, even though I had financial advisers on tap to help me out.
But half a year down the line, my portfolio is building itself while I sit back and watch, occasionally logging in to see how it's doing. This week I discovered I’d made my first £100 through investing. I’m beating cash and it feels good, but I’m still a newbie investor with a lot to learn.
Being a first-time investor is exciting, but it can be easy to get carried away. The six-month-mark is a good time to carry out your first proper portfolio review, but young investors should tread carefully, and watch out for the following classic newbie traps:
Don’t take profits now
If you’ve made money in your first six months, that’s great. But it means nothing. It might be the result of your investment judgement, but it is just as likely to be down to luck. Bear in mind that stock markets have done unusually well this year, so you shouldn’t necessarily expect your success to continue. This does not mean you should take profits now, though. If you’re investing on a regular basis for the long-term, you need to keep your money invested for a number of years, and weather the peaks and troughs of the stock market before your investments reach their full money-making potential, according to Ben Yearsley, head of investment research at Charles Stanley Direct.
He says: “The best thing to do is keep calm and carry on. If you’re a regular investor, don’t make the mistake of trying to catch stock market momentum. If you spent time researching your investments at the beginning, and you believe you have a good portfolio, trust yourself, stick to it, and don’t waste time fiddling around with it.”
Checking your portfolio every day is unhealthy
In the same way that social media sites like Twitter, Facebook and Instagram can be addictive, so can be an online broking account. If the novelty of investing is still fresh, it is tempting to obsess over your investments, checking them on a weekly or even daily basis. But this is a pointless waste of time as it will achieve nothing. Newbie investors (me included) should restrain themselves to logging onto their account on a quarterly basis, to get them out of a short-term mentality and into a long-term one.
Don’t add new investments to your portfolio just for the sake of it
If you’re continuing to invest the same amount of money every month, you should leave your portfolio well alone. The time to add more investments to your portfolio is if/when you decide to increase the amount you’re investing each month. You might decide to do this if you get a pay rise, or if you are investing for a specific goal such as a wedding or buying a house. The bottom line is that if you’re adding one or two more funds into the mix, they need to give you exposure to different investments, that you don’t already own.
As I outlined in my article in March, I have a core portfolio built purely of passively funds, as keeping costs low is a priority for me. Initially I signed up for regular investments into Vanguard FTSE UK Equity Index (GB00B59G4893) for UK exposure, Vanguard FTSE Developed World ex-UK Equity Index (GB00B59G4Q73) for Global exposure, and BlackRock Global Property Secs. Eq. Tracker (GB00B64FQP94) for property exposure. And I later invested a lump sum in Vanguard Funds plc FTSE Emerging Markets UCITS ETF USD (GBP) (VFEM) for an emerging markets injection.
My portfolio is small and simple, but it covers all the major markets. However, if I decide to ramp up the amount I’m investing every month, there are two sectors that are lacking in my portfolio that I could consider:
1. Smaller companies
If your portfolio is tracker-heavy you’re unlikely to have much exposure to small and micro companies. Actively managed funds are generally a better bet than index-tracking funds when it comes to smaller companies, because successful firms tend to outgrow the index, whereas active managers can hold onto them for longer.
Fidelity’s UK Smaller Companies fund (GB00B7VNMB18) is the top performing open-ended fund in its Morningstar sector (UK Small Cap Equity), with an average annual return of 27 per cent over 5 years (to 04 September 2014). It has ongoing charges of 1.18 per cent, which are reasonable, so it could be worth a look.
Investors Chronicle also likes Marlborough’s UK Micro Cap Growth fund (GB00B5LXWL73), which is managed by veteran fund manager, Giles Hargreave. The fund has earned a place on our Top 100 Funds list for 2014, and invests mainly in companies with a market cap of less than £250m when they are purchased, with a portion of the fund also reserved for buying companies worth less than £150m. It has produced an average annual return of 24 per cent a year over five years and has slightly higher ongoing charges of 1.54 per cent a year.
1. Frontier markets
Another region that could make a smart addition to a young investor’s core portfolio is frontier markets. These are highly risky investments that are best suited to people with 20 or 30 years to invest - however there are several snags that you need to watch out for. The best way to get frontier markets exposure is through an investment trust, but these are more expensive to buy and sell in small amounts on a regular basis through brokers because they incur trading fees. For this reason, they aren’t suitable if you are only investing a small amount as the charges will eat your returns. Mr Yearsley also warns you need a lot of patience to invest in frontier markets, as you have to be prepared to do nothing, even if your fund looks like it’s going down the toilet.
We like Blackrock’s Frontier Investment Trust (BRFI), which invests mainly in Nigeria, Iraq and Vietnam. Its performance has been impressive, producing an average annual return of more than 20 per cent over the past three years, and consistently beating its benchmark. It has ongoing annual charges of 1.73 per cent and it is trading on a 3.1 per cent premium, slightly lower than its 12 month average premium of 3.2 per cent, according to Morningstar figures.
