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Five tips for the DIY investor

Written by: Rob Morgan
Managing and monitoring your own investment portfolio has never been simpler, says Rob Morgan of Charles Stanley. Here are five top tips to consider before becoming a DIY investor.

DIY investing is not for everyone. To help you decide whether it is right for you here are some important factors to consider before taking the plunge.

1) Decide how much risk you want to take

Investing money means taking risk. To achieve a greater return than cash, all or some of your capital is exposed to potential losses. A basic rule is that if the level of risk is low, your return is also expected to be low, whereas if the level of risk is high there is greater potential to make a better return – but you could also lose money, and in extreme circumstances all of the investment amount.

The longer the timescale, the longer you have for market fluctuations to even out and, potentially, the more risk you can afford to take. This is why many people turn to assets other than cash to help grow their capital in order to meet longer term objectives such as retirement.

The main types of asset – equities, fixed interest securities, property, and commodities – each have different characteristics, but unlike cash all can fall as well as rise in value to a greater or lesser extent. History shows that over the long term the stock market (representing shares in individual companies) is the most volatile asset class but has also provided the best returns.

2) Choose your investments

Getting the balance of risk and return right can take time and depends on a number of factors – investment goals, timescale and the requirement for income. It will also be shaped by how much volatility you are prepared to accept.

Diversifying a portfolio can help control risk and mixing together a variety of investments across different asset classes is likely to lead to a less bumpy ride overall – if one of the investments is performing poorly, another one could be making up for it. If you are starting out with a modest amount of money, it is more difficult to achieve a high level of diversification; though using funds such as unit trusts and Open-Ended Investment Companies spreads the risk compared to individual shares. It is also preferable not to over-diversify and end up with multiple holdings that perform similarly – avoid duplication to keep your portfolio manageable and more nimble.

3) Active or passive

If you go down the route of buying funds rather than individual shares an important decision is to decide whether to choose whether you want to invest in active or passive funds – or combine the two.
Most funds available are “actively” managed – they’re run by a fund manager who decides which stocks to buy and sell in the portfolio. The alternative to this is “passive” funds or trackers, which simply aim to track a particular index such as the FTSE 100. These tend to be cheaper, sometimes significantly so, but will never outperform the market they are designed to track in the longer term due to charges.

4) Monitor and rebalance

Many people make the mistake of buying investments on a whim and then forget to monitor or review them. In the meantime personal circumstances or the nature of the investments themselves may have changed. Review your portfolio annually to ensure your holdings are still right for you and that they are performing as expected. It is also worth looking at rebalancing – taking some profits in asset classes or sectors that have performed well and topping up those that have lagged. This way you are getting into the “buying low, selling high” habit.

5) Make the most of tax efficient allowances

It makes sense to take advantage of your annual tax wrappers such as ISAs. This year’s ISA allowance is £15,240, which means you can shelter this amount of new investments from capital gains tax and any further income tax. Even if this isn’t relevant to you in the shorter term you should take advantage as in the future your tax position may be different.

If you are investing for retirement then a pension is likely to be an even more tax efficient route as it is possible to receive tax relief on contributions of up to 45%. However, tax treatment depends on your individual circumstances and may be subject to change in the future.  While a pension is the most tax-efficient means of saving for retirement for many people, an ISA provides more flexibility to access money when needed.

Rob Morgan is a pensions and investments analyst at Charles Stanley.

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