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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

Want to invest in 2016? 5 tips for newbie investors

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.’

Keep investing

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.’

12 comments so far. Why not have your say?


Dec 30, 2015 at 09:48

"Closet trackers" - its time these professionals or at least the financial press professionals started to name names rather than leave identification to amateur investors

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ian ribchester

Dec 30, 2015 at 12:54

They are nearly all closet trackers, just look at their portfolio that will tell you if the manager has any original ideas.Look at the portfolio of Neil Woodford ,Nick Train or Terry Smith to get a portfolio which doesn't follow the latest fad.

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kenneth douglas

Dec 30, 2015 at 13:31

What a poor article, especially for amateur investors.

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ben ski

Dec 30, 2015 at 13:46

Must say I wouldn't be advising anyone to ditch all their cash just now ..

Cash can be a drag on portfolio returns, but it's also a useful diversifier and hedge in these uncertain times ... Many top investors, such as Warren Buffett, often have surprisingly large cash allocations – El-Erian was saying earlier in the year he's moved half of his portfolio into cash

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Jayanti Gandhi

Dec 30, 2015 at 18:20

Stock market is a casino. You may review once a year portfolio and rebalance which may create more loss & commission as no body has crystal ball. Be in for long term & have mixed asset depending on risk profile.

£5000 dividend does not make any difference to basic tax payer because company pays net. It is only good for higher tax payer.

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Dec 31, 2015 at 08:47

"Look at the portfolio of Neil Woodford ,Nick Train or Terry Smith to get a portfolio which doesn't follow the latest fad."

I would rather have the latest fad than Microsoft (Smith's biggest holding) and a tobacco company (Woodford's), which are fads from a bygone era.

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Dec 31, 2015 at 13:42

I agree with ben ski. Cash is generating a real return at present, although very tiny, but with slowing growth, high valuations of bonds and equities alike, a cash holding is a respectable part of a cautious strategy. Of course, if you are gullible, you might not realise that Hargreaves Lansdown doesn't want you to hold cash because they don't make any money managing it.

I'd rather be in cash than in things like Personal Assets Trust or Ruffer, in these troubled times. It has performed better than either over the past couple of years.

Cash also means agility - if you think valuations of bonds and equities will reduce as the interest rate cycle starts to trend upwards from its world historic lows, then cash in hand to buy into the troughs is a boon.

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Alan Selwood

Dec 31, 2015 at 23:27

There's always a good reason to hold some cash : emergencies can occur, changes of circumstances can too, and best of all, opportunities may occur to buy at much more advantageous prices!

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Anthony O' Grady

Jan 01, 2016 at 10:24

Agree with comments re: cash.

Also agree with the idea of spreading one's bets, the only problem being that QE has distorted the prices of all asset markets so much, that all prices now tend to move in one direction. Central banks were only supposed to use QE as a short term measure to aid the banking system, but it seems that it is now being used to prop up the prices of bonds and equities. Companies are also using abnormally low interest rates to issue cheap debt, and then use that cash to buy back their own shares, just as governments are pulling the same trick by buying their own sovereign debt. The whole game is a huge stack of cards waiting to collapse. As David Stockman has said, honest price discovery no longer exists. The equity market has always been something of a casino, never more so than today. Dripping money into the market and re-investing dividends is probably the best strategy.

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kenneth douglas

Jan 01, 2016 at 12:27

I read the other day, that neither Lansdown or Hargreaves wish to be board members, and that each had received one Billion more to their personal fortunes. Would it be unfair of me to think, any business that can make billions in net profit in such a relative short time, must be over charging its clients.

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Jan 01, 2016 at 17:04

There is no reason to think that 2016 will be much different to 2015. Another difficult year of negative returns on the FTSE 100 is likely.

I agree with Benski and Micawber above.

There is no urgency to deploy cash unless you want to enrich your fund manager with fees.

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Michael Peters Fenwicks

Jan 02, 2016 at 09:23

Common Sense.

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