Money Observer's deputy editor Kyle Caldwell outlines handy ways for investors to both grow and protect the value of their investments this Isa season.
For those who want to get a firmer handle on their personal finances, a simple internet search will bring up scores of money-saving tips that can help individuals cut out unnecessary costs and in turn boost their bank balances.
Similarly, in the world of investment, certain tricks of the trade can help keep the costs of investing to an absolute minimum. In addition, there are simple but very effective ways investors can boost returns, particularly through the use of Isas.
We run through some of the best money-making strategies. Some may be new to you and others more familiar – but in either case, it’s well worth setting them out.
Same fund, different prices
In most cases, buyers of products who go straight to a manufacturer tend to secure the cheapest deal available, but that is not the case when you’re buying into funds. Investing directly with a fund manager is more expensive than using a middleman, known in investment circles as a platform or broker.
Today, most investors use brokers, as they are cheaper and also more accessible technologically. Moreover, most fund managers no longer actively market their products to individual investors. In the past, however, when platforms were in their infancy, and indeed before that, fund managers’ doors were open for business. And hundreds of thousands of ‘direct’ investors who bought through managers are today still paying premiums for funds that are now sold more cheaply by brokers.
That’s because typically, direct investors are paying an ongoing charges figure (OCF) of 1.7 per cent. They have been left languishing in old-style commission paying share classes, which are no longer available to new investors owing to regulatory changes first introduced in 2013 that put a stop to ongoing commission payments.
The clean (commission-free) share class normally costs half as much, on average just 0.85 per cent. For investors who choose to use a broker or platform to buy funds, a separate broker fee is applied, but that fee plus the OCF will typically add up to between 1.1 and 1.3 per cent. Holding funds via the direct route is therefore usually about a third to a half as expensive again as buying through a broker.
Use brokers to your advantage
Depending on the types of investments you hold, you can use broker charges to your advantage. For instance, in the case of investment trusts, some percentage-charging providers cap their ongoing broker charge at a certain value.
As an example, Hargreaves Lansdown, the UK’s biggest broker, charges its customers 0.45 per cent a year, but investment trust annual charges are capped at £45 in an Isa and £200 in a self invested personal pension. Isa investors with a pot size of £100,000 who buy open-ended funds therefore pay £450 a year, whereas those who purchase investment trusts are billed £45. Similarly, Fidelity Personal Investing charges investment trust investors a flat £45 a year, although its platform fee for funds stands at 0.35 per cent.
Bear in mind, however, that for portfolios of £50,000-plus, brokers that charge fixed fees, such as our sister company interactive investor, tend to work out cheaper than percentage-based platforms, whether you buy funds, investment trusts, shares or exchange traded funds.
It makes sense from both a cost perspective and from an administrative point of view to move your investments onto one platform, as typically platform charging is tiered and based on your entire pot of money. Therefore, it is often a case of the more you have, the cheaper the charges are.
Invest for the long term
Attempting to time the market is regularly described as a fool’s errand, and with good reason. Number-crunching by Wesleyan, the specialist financial services mutual, hammers this point home. The firm found that someone investing £10,000 in the UK stock market in September 1997 would have seen their investment more than treble to £32,000 by September 2017 if they left it untouched over that time. However, someone who unsuccessfully tried to time the market and missed out on five of the best days would have seen that £10,000 investment grow to just £22,000.
Factoring in the impact of missing out on the 10 best days left the investment at £17,000, making the investor £15,000 worse off than they would have been had they kept their money fully invested over the entire period. Martin Lawrence, investment manager at Wesleyan, says: ‘Riding out the peaks and troughs over the long term is more likely to provide higher returns overall, as our analysis shows.’
Make good use of the power of pound-cost averaging
One reliable way for an investor to reduce the risk that they enter the market at a disadvantageous time is to drip-feed money into an investment on a monthly basis throughout the year. This strategy benefits from what is known as pound-cost averaging. When stock markets fall, your regular monthly payment buys more shares or fund units; when markets rise, fewer shares and units can be purchased with the same sum.
Bank some profits
It’s a classic investment mistake to become too emotionally attached to a stock, or indeed fund, that has enjoyed a run of good form. To avoid complacency creeping into a portfolio, various experts, including James Norton, a financial planner at Vanguard, advocate ‘rebalancing’ once or twice a year – in other words taking profits from the winners and investing the proceeds into areas that have failed to shine of late.
Norton says: ‘It may seem counter-intuitive to sell your winners, but maintaining the risk level of your portfolio is much more important than chasing returns. It means you’re less exposed when markets fall.’
Pick the optimal share class
Once the ‘clean’ (commission-free) share classes have been identified, investors need to weigh up whether to pick the accumulation or the income share class. For those who have chosen to buy a growth-focused fund, in most cases the accumulation option will be the only choice available.
Income investors, however, have a choice and need to be careful about it. The accumulation share class reinvests the income generated by a fund manager back into the fund, while the income share class pays income to the investor in cash. For long-term investors looking to benefit from the wonder of compound interest, it is more profitable to pick the accumulation option.
Some investors may prefer to manually reinvest the income generated, perhaps into another fund, but there’s a risk that less engaged investors will do nothing and unwittingly build up their cash balances.
Isa allowance trick for teenagers
Our final trick is an Isa anomaly that parents and even grandparents may wish to take advantage of. The Isa allowance has never been more generous, nor has it been more flexible. A total of £20,000 can be shielded from the taxman in the 2017/18 tax year, and Isas offer the perk of tax-free returns on both savings (interest) and investment growth (dividends and capital gains). Investors have seven different Isa types to choose from, and they can mix and match accounts by paying into one Isa classed as a cash Isa and one that falls under the stocks and shares Isa moniker.
Breaching the Isa allowance is a nice problem to have, but for those affluent parents who want to pass on their wealth tax-efficiently to their children, there’s a way to gain an even bigger Isa allowance for teenagers. Those aged 16 or 17 can take advantage of two Isa allowances in a single tax year: £4,128 in a Junior Isa and £20,000 in an adult Isa. There are a couple of caveats, however. First, the adult Isa has to be the cash version, so dismal rates of interest will need to be stomached. Secondly, there could be inheritance tax implications if the money gifted is more than £3,000, but there are various allowances to minimise any bills incurred.
This article was first written and published in the March 2018 edition of Money Observer.