In almost every period, the stock market has outperformed deposit accounts. With the current derisory rates of interest, equities are the obvious answer. Many are put off by imagining that substantial sums are required. Yet for just £30 a month, a professional manager will select bonds and shares within a collective, thereby reducing volatility.
If placed in an Individual Savings Account or ISA, the investment growth is exempt from both income tax and capital gains tax. An adult allowance of £15,250 and junior of £4,080 is available each year. If not used, even in part, it cannot be held over.
The only concession on timing is that if the choice of investment is to be made shortly, intermediaries may receive the money now and apply it when your named company or fund is known.
If unsure where to invest, use one of the many free websites (such as fundcalibre.com) or consult an experienced independent financial adviser.
Consider what the money is aimed at (such as a car, property, wedding or retirement), the length of time to invest and level of risk you are prepared to take. Before investing, pay off any expensive debt and have sufficient cash in hand to pay for any emergency. This will stop you going into debt or cashing in investments at the wrong time if money needs to be sourced quickly.
Avoid delaying saving by thinking that access to your money will be difficult if required as – apart from pension contributions – the funds can usually be returned immediately.
Do not fret unduly about the right timing. Far too many savers look too closely at the news rather than the long-term characteristics of the sector, geographical location or managerial expertise.
The secret of financial success is to diversify. “If you’re concerned about stock market risks, you can reduce these by also investing in other asset classes such as fixed interest and property alongside shares,” suggests Jan Anderson of advisers Chase de Vere in Leeds.
Anderson warns to not be swayed by those investments which are top of the performance tables: “Strong recent performance should be seen as a warning sign rather than an opportunity to buy as investment gains have already been made and so you risk jumping in at the top of the market.”
Review your investments regularly, at least on a six-monthly basis, to ensure they are performing in line with expectations. If they are under-achieving, check the reasons before making any changes.
For first timers, start with a good, low-cost UK tracker fund which will give broad exposure to the stock market, such as the HSBC FTSE All-Share Index fund. If £1,000 had been invested in this index 30 years ago, Fidelity International say it would now be worth £14,734.
Whilst it is composed of the largest companies quoted in London, 75 per cent of their earnings are from overseas.
Anderson says risk could be spread further by selecting a global equity fund, such as Fundsmith Equity or Witan Investment Trust. For those who want to adopt a more cautious approach, opt for the Schroder Multi-Manager Diversity fund which spreads risk by investing one third in shares, one third in cash and fixed interest and the balance into other investments like commodities, hedge funds or property.
Most friendly societies offer excellent ways for first timers to save. Look for both tax-exempt savings plans (where £25 monthly or £270pa can be invested) and with-profits investment funds. Many of the latter have an ISA version (both adult and junior) and can receive money on a regular basis as well as lump sums.
As an example of ISA performance, after charges, Sheffield Mutual has delivered 18.4 per cent growth over the last five years. Founded in 1892, the Tankersley-Barnsley based society is one of the top performers among friendly societies. In addition to investment appreciation, it makes discretionary dental and optical grants.
First timers approaching the property sector should not be discouraged by learning that the average home in England and Wales now exceeds £300,000 but as a rewarding opportunity.
Whilst average salary growth has shown 22 per cent in the last 10 years, property has jumped 50 per cent. According to property website Rightmove, a new high of £303,190 was achieved last month.
The average asking price for first-time buyers is £185,612 based on 13,000 estate agency branches listed on its website. An initial purchase is an exciting milestone but the mortgage process can be long and confusing. Pete Mugleston from Online Mortgage Adviser gives five helpful tips before buying:
Obtain copies of your credit reports
Save as large a deposit as possible with most lenders requiring 5-10 per cent. The higher deposit, the lower the loan-to-value ratio (LVR)
Use ‘whole of market’ broker to find best deal rather than leave an enquiry ‘footprint’
Determine how much you can afford, usually offered up to four or five times pre-tax salary
Do not be lured by a great rate when the small print reveals application fee, valuation charge, administration fee, completion expense.
Ben and Alex Thomson, a windscreen installer and occupational therapist respectively, recently secured their first own home, a semi-detached house in Bradford which was built in the 1970s.
The couple, aged 26 and 25, applied to the Leeds Building Society for funding, opting for a 40-year repayment plan. They chose to pay zero per cent interest for three months and 35 months at a fixed 4.71 per cent on a 90 per cent LTV.
Various levels of survey are available and the Thomsons had a fee-assisted home buyer’s one to which they contributed £230. Leeds does not help finance legal costs except on remortgages and the couple paid around £900.
To compare home loan providers, look at the respective APR. Leeds says it is 5.7 per cent on a typical 95 per cent LTV with 3.89 per cent interest on £100,000 loan over 25 years, repaid monthly at £527.27 for two years and then at £625.88 over the remaining 23 years.
Part purchase, part rent shared-ownership plans now form another way for first-time buyers on to the property ladder for those who cannot afford an outright purchase. Shared ownership was formerly restricted to key workers and other special groups.
The Help to Buy loan is another innovation, available from most mortgage providers on properties up to £600,000 in England provided they are new-build. The applicant only needs to find five per cent of the value as a deposit and the Government provides a 20 per cent loan on an interest-free basis for five years. The rate then becomes 1.75 per cent and rises in line with RPI plus one per cent.
Conal Gregory is Headline Money Regional Financial Journalist of the Year.