Make 2014 the year you start investing

By  Richard Evans

Will 2014 be the year when you take your financial future into your own hands? There are certainly plenty of reasons to take the plunge. 

Perhaps you have been thinking for a while that, unlike your parents, you cannot expect a generous pension from your employer – or an earnings-linked one from the state. 

You’re also sure to know that you’ll have to work until later in life before you qualify for the state pension – probably into your 70s if you are currently in your 20s – and that, thanks to improvements in longevity, your savings may have to last three decades or more. 

In fact, you’ve probably resolved several times already to set up a long-term savings plan and start paying a decent sum into it every month. But it’s an easy decision to put off; there are forms to fill in, identity documents to find – and that’s before the hard part of deciding which investments to buy. 

But the new year is the perfect time to make sure that your bold resolutions are put into practice. Better still, the process of becoming a long-term investor need not be either difficult or tedious. 

Modern technology allows you to start an online Isa or other savings plan in minutes, while there is a wealth of advice and information available on the internet to help you decide on your actual investments. 

Our guide will help you get started. No two investors are the same, so we’ve looked at three broad types: those who just want the simplest possible way of investing in the stock market; those who are prepared to do a little work at the outset but would like to take a “buy and forget” approach; and people who are happy to keep their investments under regular review. 

INVESTING FOR THE TRULY LAZY  

There are two main ways to invest in the stock market. The first is to choose specific shares – or get someone to do it for you – and then keep an eye on how they perform, with a view to changing your portfolio periodically. 

The second way is easier. It is possible to put your money into an investment that simply rises (or falls) in line with the whole stock market. So if you read in the newspaper that the FTSE 100 rose by 2pc on a particular day, you will know that your own investments – they are called “tracker funds” – did the same. 

A FTSE 100 tracker fund will simply own shares in all 100 companies that belong to the index. 

However, while tracker funds are simple in theory, the City firms that sell them have managed to muddy the waters. For one thing, the annual charge that they levy to run the fund on your behalf can vary widely – and over a period of decades even a small difference in these charges can have a huge effect on the value of your savings. 

Some trackers also cut corners when it comes to replicating the performance of the wider market. Among those that do not, the cheapest include HSBC’s FTSE 100 Index fund, which charges an annual fee of 0.17pc. 

You can normally buy funds either directly from the company or via an online fund shop, often called a “fund supermarket” or “investment platform”. The latter gives you the flexibility to switch funds easily, although it will often levy an additional charge. 

One of the cheapest fund shops is AJ Bell Youinvest, which will charge 0.2pc a year on top of the fund’s own fee. Others include Charles Stanley Direct, Barclays Stockbrokers and Hargreaves Lansdown. 

IF YOU ARE HAPPY TO DO SOME WORK AT THE OUTSET  

Some people are not comfortable with the idea of simply following the ups and downs of the whole stock market. After all, London-listed shares are still worth less than at the turn of the millennium, although these losses are counteracted by the dividend income that they have paid. Tracker funds may therefore not be an ideal choice if you are just a few years from retirement. 

If you want to try to choose the “right” shares, you need a different type of fund, one that employs an expert manager who looks for stocks that seem undervalued or likely to pay bigger dividends in future. 

Choosing the right fund manager can seem a huge task, as there are thousands of funds on offer. But if you want to be able to “buy and forget” your funds, you’ll want a manager with a good long-term track record, of whom there are relatively few. 

Neil Woodford is arguably Britain’s most renowned fund manager, although he is about to switch company from Invesco Perpetual to Oakley Capital. Richard Buxton, who runs the Old Mutual UK Alpha fund, Nigel Thomas of the Axa Framlington UK Select Opportunities fund and Adrian Frost, manager of the Artemis Income fund, have all been running money successfully for a long time. 

Experts say the fund manager, rather than the fund company, is the key to performance, so be ready to consider switching if the manager of your fund announces his or her departure. It’s also sensible to keep an occasional eye on performance, although this is best assessed over a period of at least three years. Consider holding more than one fund for extra diversification. 

Funds that can invest internationally also spread your risk, although you do become exposed to currency fluctuations. Terry Smith, who runs the Fundsmith Equity fund and has large holdings in American companies, is another experienced manager. 

Anyone close to retirement may want a fund that also owns other types of asset, such as bonds and property, to reduce the likelihood of sharp ups and downs. Examples include the HSBC World Index Balanced Portfolio and Vanguard’s LifeStrategy 60pc Equity fund. 

FOR HANDS-ON INVESTORS  

Many people enjoy managing their investments closely – and for them there is a wealth of information and choice. 

You could, for example, invest in funds that buy a certain type of company, such as technology firms, or specialise in particular regions of the world. Such funds tend to be more at risk of severe ups and downs that even a skilled manager may be powerless to avoid, no matter how well chosen his or her holdings. Doing your homework to understand the way these specialist markets work, and being prepared to switch if the situation changes, is vital here. You will probably want to read the financial press and keep abreast of information about funds and managers using specialist websites. 

You could go one stage further and invest in shares directly. One big advantage of this approach is that you avoid paying fund management charges, but you will need to research your companies thoroughly and keep on top of any developments. 

Numerous techniques exist to help investors pick the right shares. However, many successful professionals say they never invest in companies they don’t understand, that they pay close attention to the “cashflow” figures in the accounts, rather than the reported profits, and that return on capital is a key measure of a company’s success. /Telegraph