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Seven questions all investment beginners should ask

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17/01/2014
If your new year's resolution is to start investing, read our essential checklist before you do anything.

So you’ve decided to become an investor this year, but what now?

Starting out can be a daunting task and you are bound to have a long list of questions.

While the process of actually investing your money can be as easy as a clicking the ‘Buy’ button, the time and effort required to whittle down which stocks and funds you want to invest in tends to be what new investors struggle with the most.

To help you on your investment journey, we have come up with some starter questions.

Do I need advice?

Novice investors are often encouraged to seek advice from an independent financial adviser, even if it is just for an initial assessment. During the assessment the adviser will help you figure out what kind of investor you are and how much risk you are willing to take on.

The adviser should ask you detailed questions about your circumstances, your goals and how you feel about taking risks with your money. The answers to these questions will help them narrow down your investment options, the products that are suitable for you and what you can afford.

There are some common misconceptions about when or how wealthy you should be to get advice, but seeking advice early on can help get you comfortable with the world of investing without making costly mistakes.

Investors should note that since December 2012, changes to regulation in the UK under the Retail Distribution Review (RDR) mean you and your adviser will have to agree on a fee upfront.

The RDR was introduced to try and make the process of seeking advice more transparent. It means financial advisers can no longer accept commissions or so-called ‘trail fees’ from product providers, which could influence their recommendations.

Read more about what the Retail Distribution Review is and how it affects you

Click here to find an adviser in your local area. 

Should I take the DIY route?

If you decide to try your hand at investing your money then it is paramount you read and research as much as possible, even if you plan on handing your money over to a professional fund manager for a long time.

As a DIY investor you will need to regularly review your investments and keep yourself informed of any changes that could affect your portfolio, whether it is a change in the UK’s economic outlook or changes to fund charges.

Read our guide to getting started as a DIY investor.

Things you should consider whether you seek advice or go it alone:

How much risk am I prepared to take?

What stage you are at in life will dictate how much risk you are willing to take on and how long you would be willing to lock away your money in an investment.

It is worth noting that your attitude to risk is likely to change throughout your life, so again, it is wise to review your investments at least once a year to ensure they still meet your needs and goals.

What should my portfolio look like?

There is no simple answer to this question as every investor has different attitudes to risk and preferences for one sector/region or another.

But whether you are a novice investor or a seasoned pro, it is advisable that you never put all your money into one single investment.

Having a diversified portfolio is key to ensuring that any sharp market shocks are spread out, and that should the worst happen in one sector or with one company, you don’t lose all your hard-earned money.

You can diversify your portfolio by sector or geographically.

This article is a good starting point if you are trying to work out what your portfolio should look like.

And here are some expert tips on where to invest in 2014.

Active vs. passive investing – which is best?

There is a long-standing debate in the investment industry over what is better: active or passive investing.

An active fund has a manager actively picking stocks or companies to try and beat the market, whereas a passive, or tracker fund, simply tracks a given index. For example, the FTSE 100.

The argument used to be that active funds cost more than tracker funds because you pay for the manager’s stock picking skills and expertise.

However, the introduction of lower cost, ‘clean’ priced funds on the back of the RDR has gone some way to discredit this argument.

Read about what clean shares are and how they affect your investments.

How do I pick an investment platform?

In recent years, the number of online execution-only investment platforms has risen dramatically, and while this means more competition which could ultimately benefit the end investor, it can also make choosing one over another very difficult.

Our guide on how to pick an investment platform explains charges, what tools to look out for and a run-down of the biggest names in the market.

What can I do to mitigate tax?

A report out last year from Prudential found that almost a third of DIY investors could be losing out on returns because they fail to take into account taxes and charges.

All investors are encouraged to make use of their annual Individual Savings Account (ISA) allowance, which is a ‘wrapper’ that protects any profit you make on an investment from tax.

Read our guide to ISAs and how best to utilise these tax wrappers.

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