Without guidance, it is easy to drift into under-performing areas that will not achieve the results expected.
A money box may occasionally have been emptied for its contents to be held in a bank or building society deposit account but – with the notable exception of Halifax’s Kid’s Monthly Saver which pays a fixed 4.5 per cent – hardly any other high street plans have rates above inflation.
Start by considering for what you are saving and the time frame. Perhaps initially money should be built up to fund both a mortgage deposit and retirement.
The earlier an investment is undertaken, the greater the opportunity for growth. Einstein said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Do not underestimate the length of time in retirement and the necessary money then required. A newly-born can expect to live to 104, according to Professor Sarah Harper of Oxford University.
Start contributing to a pension as soon as there is spare money. Even a baby or someone without a salary can pay up to £2,880 annually and have £720 added by the Government. Auto-enrolment has helped millions to have a pension beyond the state facility.
Build up some cash for any emergency and safeguard with two key personal insurances: critical illness and income protection. If you have any dependents, add terminal cover.
Whilst cash could be built up in an Individual Savings Account (ISA), the earnings will probably not exceed the annual personal savings allowance of £1,000 for basic rate taxpayers or £500 for higher rate.
To help finance a first home, if aged 18-39 years, open a Lifetime ISA. Up to £4,000 can be contributed each year until 49 years and the Government adds 25 per cent.
Do not worry if it is not used for property as it can form part of your retirement pot and can be withdrawn from 60 years or earlier if terminally ill. The amount invested incidentally is part of the annual £20,000 ISA allowance.
A Lifetime ISA is simply a tax wrapper. It can be filled with cash or a stock market investment. Providers for the former pay derisory interest well below inflation. Instead, in view of the long time scale, take the latter route.
The contents of an ISA is free from capital gains and income taxes. Only stamp duty on shares needs to be paid which is just 0.5 per cent.
However, its value forms part of your estate on death unless it is transferred to a spouse or civil partner.
Consider your attitude to risk, ideally with the help of a qualified and experienced financial adviser. This is the measurement of the potential loss and gain of your savings.
Advisers may come from independent firms but do not overlook those with larger bodies like the Newcastle and Skipton building societies, checking how far they can comment on all products or only those which are tied.
It is important to feel comfortable with investments. Seek balance and diversification which can be achieved by opting for: different assets; alternative financial products; wide geographical spread.
Check regularly that your plan is on course. It may be prudent to set a sale limit – say 10 per cent – for each investment when the value rises or falls by that amount.
In that way, profits are locked in or losses stopped. Too often investors hold on to poor performing assets through sympathy or become greedy for ever more success when a share has a galactic return.
Use tax breaks where possible but do not let them control decision making. For example, most shares bought on the Alternative Investment Market (AIM) come with IHT exemption if held for two years but such an asset may be outside your risk tolerance.
Share dealing started in 1553 which was a fund to raise money to explore new lands. Do not be put off investing in the stock market by only having a small sum. Many providers will accept even a few pounds and some have monthly subscription schemes.
For investment trusts – collectives which are listed on the London Stock Exchange – regular contributions can start from £10 (Pantheon through The Share Centre), £25 (Caledonia), £50 (BMO and Fidelity) or even have no minimum (Troy through Equiniti).
Watch for charges. Pantheon and Troy offer free purchases. The platform fee to hold your investments can vary significantly. On £1,000, the annual charge can be £4.10 with Vanguard, £8.20 with Wealthify and £10.10 with Nutmeg.
In the stock market, consider both equities (shares) and bonds (fixed interest offered by a government or company).
Ensure diversity by accessing global economies and do not become over-dependent on the UK. Leading companies quoted in London are, in fact, international in their trading with only 13 of the FTSE 100 companies entirely UK earners.
Analysis last year of investing £13,000 over two decades shows £34,694 would have been generated in UK stocks but £51,427 in global ones.
For a novice, saving in a single company can be risky even if it is a quality one you know well such as Dunelm for home furnishings. Instead a share or bond collective will reduce risk and volatility and come with a professional stock picking manager.
Factsheets showing major holdings and other key information are available online. Fund names can be misleading, such as Scottish Mortgage which has just 2.6 per cent assets in the UK and is not a home loan provider but a global fund with large technology assets.
‘Roboinvesting’ is the term for when a manager decides on the purchase, sale and mix. Several leading friendly societies offer such funds which may be on a with-profits or unit-linked basis.
Some banks and building societies may offer more than one such collective to allow for different risk profiles.
When looking at a sector or share, see how it has performed against the benchmark. Research on equity funds by S&P Dow Jones revealed that 73 per cent of UK and 92 per cent of US underperformed their benchmarks over 10 years.
Open-ended funds like unit trusts can expand or contract on demand. Mark Carney, who recently retired as Governor of the Bank of England, warned that such “funds are built on a lie, which is that you can have daily liquidity for assets that fundamentally aren’t liquid”.
By comparison, savers may prefer investment trusts for clarity.
Finally, decide how much to go for growth or income. Prior to the financial effects of coronavirus, the top investment trust sectors over 10 years were biotechnology and healthcare (up 412.1 per cent), UK smaller companies (303.1), global smaller firms (292.5), global (239.1) and private equity (221.4).
Case study: Good asset diversity
Cerys Evans, a 19-year-old student from Sheffield, decided to open an ISA with the proceeds of a matured baby bond.
She says: “It’s helpful to have a chunk of money set aside from day-to-day needs.”
Cerys is reading Mathematics at Lancaster University. She chose a with-profits stocks and shares ISA with Sheffield Mutual Friendly Society after receiving advice from financial adviser, Chris Spear of Spear Financial, based at Pilsley, near Bakewell.
The ISA fund at Sheffield Mutual gives good asset diversity with property, UK and global equities and fixed income in its mix.