etting up an investment portfolio can seem like a daunting task if you don’t know
where to start.
However, if you’re willing to put in the time and effort to learn about the markets and how to invest, the rewards can be life-changing (although it should be made clear rewards are not guaranteed, and investors can lose as well as make money).
There are two ways to invest in the market. You can either choose the investments yourself or appoint an investment manager or automated investment manager, commonly known as a robo advisor. These investment manager products will try and understand your risk tolerance and ambitions for your money and then build a
portfolio accordingly.
The other approach is to build your own investment portfolio. This requires more work and does not necessarily lead to better returns, although it does give you more flexibility and control over your money. There’s also no need to pay an investment manager, suggesting the fees of investing may be lower overall.
Building a portfolio
There are two main styles of investing. So-called active investing, which involves picking and choosing individual stocks as well as other assets, such as bonds, and trying to outperform the market through detailed fundamental analysis.
The other style of investing is passive investing. This involves buying what is known as a passive investment fund, commonly known as a tracker fund. These are only designed to track the performance of the market. They are attached to an index, such as S&P 500, FTSE 100 or FTSE 250 index.
These funds are only designed to track an index, so they tend to come with very small management fees compared to actively managed products (funds where managers try to pick stocks to outperform the market). The funds are cheaper, but the downside is they don’t outperform over the long term because they are not designed to.
The investment approach you decide to use will depend entirely on your risk
tolerance and level of understanding of financial markets. Some investors decide to go down the passive route because it requires little time and effort. In contrast, others may take an active approach because they enjoy the process of trying to uncover undervalued securities.
Whichever approach an investor uses, there are two things they must always keep in mind.
Investing is an unpredictable art, and there are only two things investors can control at any time: the price paid for an asset and costs. That’s why it’s important to keep costs as low as possible and find a broker with low fees and management charges. It’s also why it’s important to try to minimise risk by not overpaying for assets and not buying something you don’t understand.
When choosing the investment style you want to use, it’s important to consider how you want to deploy your money.
What does this mean? Well, if you use a self-invested personal pension or SIPP, it is possible to achieve significant tax benefits. Investing within an ISA wrapper also has significant tax benefits. These powerful tools can help investors turbocharge their returns over the long term. And they are especially important now that the government is clamping down on dividend and capital gains tax allowances.
ISAs allow investors to save £20,000 a year and invest this money how they see fit. They can trade it actively, invest in passive funds or buy active investment funds. Whichever approach an investor chooses, it’s always tax-free - there’s no need to declare any transactions, capital gains or dividend income to HMRC.
A sensible investment approach, combined with a low-cost investment account and the tax benefits offered by both investment wrappers, can be powerful tools for creating wealth over the long term.
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