Getting into investing is a smart idea to grow your wealth over time, especially in the low-interest-rate world we live in.
By Edmund Greaves
Once upon a time it was easy to save money into a bank or building society savings account and get a sizeable interest rate for your trouble. With the Bank of England base rate at a historic low of just 0.1% however, this is nigh on impossible these days.
That being the case, if you’re in your 20s and 30s, it might be time to consider creating your own investment portfolio.
You may have started on your investment journey with an ISA or a pension pot, but it’s important to remember that investing is all about goals and should never be about making short-term gains or getting rich quick.
So here are four key things to consider when building your very own investment portfolio in your 20s and 30s:
The value of investments can fall as well as rise and any income from them is not guaranteed and you may get back less than you invested. Past performance is not a guide to future performance.
EQi does not provide investment advice. If you are in any doubt as to the risk or suitability of an investment or product you should seek advice from an independent financial adviser.
The extent and value of any ISA tax advantages or benefits will vary according to the individual's circumstances. The levels and bases of taxation may also change.
To achieve the long-term aim of steadily growing your wealth, regular investing and planning should be your number one aim. This can be done through a variety of investment products, such as a stocks and shares ISA, Lifetime ISA (LISA) or even a personal pension called a SIPP (self-invested personal pension).
For someone in their 20s or 30s the aspiration is pretty simple – long-term capital growth. This can be for the goal of either saving for a home, which the LISA is an ideal product for, or for retirement and other long-term financial objectives. This can be done one of several ways using the aforementioned products, but principally it means you are investing through the stock market by buying shares in companies or so-called ‘equities’.
When you have so many years before retirement, investing in less risky assets such as bonds (debt issued by governments or companies) or precious metals like gold, is probably an overly-cautious approach. You have the benefit of time so should maximise the opportunity for growth by investing in shares.
When it comes to picking which companies to invest in, there are a few different things to look out for. You need to consider what the company does, what its prospects for growth are, how strong its finances are and whether it faces significant competition.
Companies that focus on emerging industries often pose the best prospects for growth. Entire industries built on technology such as cloud computing, robotics or electric cars didn’t exist as little as 15 years ago. Thinking about what companies are taking advantage of trends coming in the next decade, or even further, could make for a good starting point.
In recent years companies such as Google and Facebook have proven to be excellent investments. This is because they face little real competition. But some would now argue as the world changes, this may be changing too. Finding “the next Google” is challenging – but ultimately this is what will provide the best long-term growth for a portfolio.
Finally, it is essential to consider what a company’s financial outlook is like. Professional investors pore over financial statements, annual results and more detailed information such as profits, ‘EBITDA’ and price-to-earnings (P/E) ratios. These concepts are a little more involved however, so you should make sure to learn about them and research more carefully before making a decision.
Picking which companies will be successful and therefore grow the value of your investment in their shares is no easy feat. As an alternative you can invest through funds instead.
For a fee, a fund manager who is an expert in their field, will invest on your behalf with the oversight of an asset management company to ensure they do a good job. This is called active management.
There is an alternative to this, however, called passive management. Passive investment funds don’t have a manager picking investments per se, but work on the basis that stock indices such as the FTSE 100 or S&P 500 tend to grow in value over time, regardless of how the individual companies listed on them are performing. As such a passive or ‘index’ fund simply buys a set amount of shares in all the companies in that index or sector.
Passive funds are also frequently referred to as ‘Exchange Traded Funds’ or ETFs. These are differently structured to a normal passive fund but typically similar in goal – to track the performance of an index of companies. Oftentimes they can be even cheaper than index funds, charging miniscule fees.
Both active and passive have positive and negative aspects. Actively managed funds tend to cost more to own as the manager takes a bigger cut. But the best active funds can also significantly outperform the index or sector they are benchmarked against.
Passive funds meanwhile tend to be much cheaper to hold, but their performance will never beat the index they follow – they are the index essentially. However, they will also never underperform – something that does affect managers of active funds who may make bad decisions.
Typically it is a good idea to have a blend in your portfolio of both. Passive funds can form the core of a portfolio and actively managed funds can make for an alternative investment approach to simply tracking an index.
The next crucial facet to your portfolio to consider is what kind of sectors you want to invest in and where in the world they are based. Many people suffer from home bias, where they invest locally in UK companies. But mature economies such as the UK don’t have such big growth prospects compared to so-called emerging markets in regions such as Asia where economies are growing exponentially.
Likewise, certain industries are in decline while others are booming. Companies that operate in high technology such as Google and Facebook barely existed 20 years ago but are now some of the biggest in the world. The corresponding value of their shares has exploded in recent times as investors realised their potential.
That being said, investing too heavily in one region or sector is also not a great idea. Balance is key, so you should try to hold funds that cover several different regions or themes. If you’re not sure about picking specific areas it may be best to plump for a ‘globally-focused’ fund that will inherently be diversely invested across the world.
Once you’ve decided what you would like to invest in, you should consider how you want to go about it. Starting out with a lump sum can be great, but isn’t a requirement. Investing can begin from just £10 a month. Check out our investment calculator to get an idea of how much you’ll need to invest on a monthly basis to achieve your portfolio’s goals.
Investing regularly is a great way to build up a portfolio over time. It also helps protect in times when markets are falling, which means the value of your portfolio will fall as well.
If for instance you buy a unit in a fund worth £100 in one month, but the value of that fund falls by 5% because of a volatile market, when you invest the next month you’ll be buying more of the fund essentially at a discount. This process is called ‘pound-cost averaging’.
Finally, don’t be alarmed when markets fall and the value of your portfolio dips. While it can be very unsettling to watch, markets do tend to grow over time. Since your time horizon is longer, such falls will be a blip in the long-term process and won’t substantially affect the value of your investments. Plus, by investing more when investments are relatively cheap, you will maximise the subsequent growth potential.
Also in this series:
How do you know where to start when there are so many funds to choose from? Start with just three, aligned to your appetite for risk.
As you build your confidence over time and know what to look for, it helps to have more choice. See our top fund picks aligned to your investing goals and your appetite for risk.
We've added new fund lists for experienced investors, so whether you're looking to invest in Emerging Markets, US equities or ethical funds, we've got 3 starter funds for you to choose from.
This article was written by Edmund Greaves, personal finance journalist.
The views and opinions expressed by the author may not necessarily represent views expressed or reflected by EQi.