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The foundations for building your first stocks and shares ISA

adamlewis
Written By:
adamlewis
Posted:
Updated:
21/03/2016

The Share Centre’s head of investment research Andy Parsons summarises the benefits of choosing a stocks and shares ISA as a savings platform and outlines four solid foundations that will help investors build their first ISA.

We all have dreams and aspirations and unless you are extremely lucky and inherit a substantial amount of money, in order to fulfil these dreams, you will need to make your money work harder. Interest rates are low, and are likely to remain so for the foreseeable future.  Furthermore, inflation remains benign, reiterated by the Chancellor stating in the latest budget that it is forecast to be below the 2%  target in 2016, with the hope of returning gradually to 2% in 2018. At present, a stocks and shares ISA could therefore provide investors with an opportunity of a greater reward.

At The Share Centre, we believe that if you follow the four considerations below, you could make your money work for you:

  1. Why am I investing?

The first thing you have to contemplate is your investment objective – what are you saving for and how much risk are you prepared to take with your money? Whether it is your first home, a wedding or university fees you need to visualise the amount needed and the length of time in which you want to achieve this. Don’t set unrealistic targets and appreciate that your attitude to risk will be a key determinant as to whether your dream has any chance of fulfilment.

  1. How much can I afford?

Once you have an appreciation of the investment pot required to reach your goal, you can begin to think about how you can get there. ISA calculators are a perfect way to discover how much your money could grow in a Stocks & Shares ISA compared to a Cash ISA. You can input your monthly contributions, timescale and a projection rate and it will give you a much better idea of whether your dream is merely that or is actually potentially achievable.

Don’t be greedy, if you can’t afford to invest too much and accept a higher degree of risk, reappraise your visions and set a more realistic target.

  1. How do I start?

Your strategy really depends on how much time you have.

If you have little or no time, then you could consider an open ended, low risk fund that tracks an index such as a tracker fund or ETF. This way you will be spreading risk, incorporating some diversification and ultimately keeping your costs down, increasing your chances of profitability.

For a first time investor, we would recommend something along the lines of a tracker that aims to replicate the FTSE All-Share index.

If you have more time, then we would suggest building your own diverse portfolio by introducing individual equities alongside a fund or investment trust. However, a little due diligence is needed to make sure you are not over exposing your portfolio to a particular sector or region, or allowing any one individual company to become a significant proportion of the overall portfolio.

  1. Be wary of costs

There are a number of varying tariffs available and whilst some may seem more attractive in the short term, you should consider the longer term position. The administration costs are often stated as either a percentage of the holdings or a flat fee. Remember that with a flat fee, you’ll always know the total cost each year. Whereas with a percentage based arrangement it’s determined on the value of the underlying portfolio and if that grows, so does your charge.

Andy Parsons is head of investment research at The Share Centre