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Want to invest in 2016? 5 tips for newbie investors
If you want to start investing this year then make sure you consider tax, your goals and costs.
by Michelle McGagh on Dec 30, 2015 at 00:01
The start of a new year is the perfect time to get your finances in order, but don’t just resolve to pay off that credit card, make sure your investments are working hard for you in 2016.
You don’t have to be a financial whizz to benefit from savings and investment, you just need to take a common sense approach and follow these top tips.
Make the most of tax allowances
From 6 April, the way cash and dividends are taxed changes. The first £5,000 of dividend income will be tax free and after that an increased tax of 7.5% is paid by basic rate taxpayers and 32.5% for higher rate taxpayers.
All savings income will be paid without income tax deductions, including interest on cash deposits, gilts and corporate bonds, as well as the interest earned through peer-to-peer lending. Basic rate taxpayers can earn £1,000 in interest a year before paying any tax and higher rate taxpayers can earn £500 a year before being taxed.
On top of this, Danny Cox of Hargreaves Lansdown, said investors should make use of ISA and self-invested personal pension (Sipp) allowances.
‘It also makes sense to shelter income-producing assets in your ISA and Sipp before growth assets,’ he said. ‘This is because the rate of tax paid on income is generally higher than on capital gains and capital gains tax (CGT) can be avoided if profits are less than £11,100 a year.’
Investors can also hold more low-yielding assets outside of an ISA before exceeding the new dividend allowance.
‘A £140,000 equity income portfolio yielding 3.5% would pay just under £5,000 a year in dividend income, tax-free within the dividend allowance,’ said Cox. ‘However, investors could shelter a £500,000 portfolio yielding 1% before paying tax on the dividends.’
Ditch the cash
Cash is not the friend of the investor, particularly when it hasn’t been moved into the best interest-paying accounts. Dspite this, a recent regulatory review found a third of money in easy access accounts had been there for more than five years.
Cox urged investors to move their money as it was unlikely savings rates were unlikely to get better any time soon.
‘The interest earned on cash deposits is almost certain to remain in the dumps for most of 2016 and beyond,’ he said. ‘Longer term, the markets tend to produce better returns than cash. Consider that yields from equity income are currently around 3% to 4% which compared very favourably to best buy savings accounts and provides growth potential.’
However, he added that investors should only take on a level of risk they are comfortable with and said access to some cash is important.
Start the year off right
Use the beginning of the year to review your goals and your portfolio to ensure your money is working in the way you want.
‘All investors should review their portfolio at least once a year,’ said Cox. ‘This way there are no nasty surprises waiting for you when you finally come to cash in your investments.’
Cox said individuals should look at how well their funds are performing in order to ‘weed out any serial underperformers’ and ensure their investments are still right for their circumstances, such as their employment status.
Adrian Lowcock, investment expert at AXA Wealth, said in order to invest your money wisely you need to know why you are investing.
‘Knowing why you are investing in the first place is important as it is a great incentive to invest appropriately,’ he said. ‘Setting a goal, whether it is for a dream holiday or just for your future, will help you decide how much risk you are willing to take and how long you are likely to be investing for.’
Look at costs
If you want to invest it will cost you but those costs can be managed. There are two types of funds; active funds which are run by a fund manager who chooses which stocks to invest in, and passive funds which track an index (and are also known as trackers). The latter are far cheaper than the former.
However, Cox warned that ‘too many funds are closet trackers which charge fees for active management but provide an index-like return’.
While there is nothing wrong with choosing active fund management, Cox said investors need to ensure they’re getting value for money.
‘Investors should rid their portfolio of this deadwood, and replace these funds either with proper index trackers at a fraction of the price, or a truly active fund run by a talented and proven fund manager,’ he said.
‘It is absurd that some investors are paying more to invest in closet trackers than they would to invest with the UK’s foremost fund managers.’
Part of keeping costs low is to know when to buy into the market. Lowcock said that while it feels counter-intuitive, investors should jump in when stocks are cheap.
‘It is human nature to avoid investing in stockmarkets when they have fallen or risk seems the greatest,’ he said. ‘Buy low, sell high is an obvious mantra but few investors actually do it. When markets are low investor confidence is also low so they do not invest until markets have recovered and confidence returns.’
If you want your money to grow, the right investments are key but more importantly, you need to keep saving.
‘The best way to grow your savings is to use as much of your annual ISA and pension allowances as you can,’ said Lowcock. ‘Regularly topping up your investments mean you can buy at different times and feed money into markets at attractive levels.’
When choosing what investments to buy look at how ‘diversified’ your money is and make sure ‘you have the right mix of assets in your portfolio’, said Lowcoc.
‘Make sure you have a mix of bonds, equities, commodities etc, that matches your risk appetite. Getting the right asset allocation is the most important factor to investment returns.’
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