Investing: Expert explains the ‘one golden rule’
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You need to invest a lot more than £1,000 to build a nest egg to supplement your State Pension, but it is always better to invest something than nothing. By adding to your savings pot whenever you have money to spare, and leaving it invested through thick and thin, your money should grow and grow.
The stock market can be volatile in the short run but over the longer term should beat almost every other investment, particularly cash, said Laith Khalaf, head of investment analysis at fund platform AJ Bell.
“If you’ve got £1,000 to invest then are probably only going to be buying one fund, so you’d better make it a good one,” he said.
Ideally, you should aim for a well-diversified fund, investing in scores of companies across different countries, regions and sectors, to spread your risk and take advantage of opportunities around the world.
Khalaf highlights three investment funds you can buy inside your £20,000 tax-free Isa allowance. Some are riskier than others.
US stocks have beaten the world for a decade (Image: Getty)
Fidelity Index World Fund. Khalaf said this will appeal to adventurous investors, who are happy to take a bit more risk with their money in the hope of generating a higher return.
“This is a simple tracker fund which follows the global stock market as measured by the MSCI World Index, giving you heaps of diversification.”
If you had invested £1,000 in this fund five years ago, you would have £1,837 today. If you invested 10 years ago, you would have £3,178, more than tripling your money.
Fidelity Index World Fund holds top US stocks including Apple, Microsoft, Amazon, Facebook and Google-owner Alphabet, which have delivered incredible returns lately but may not always outperform.
It has low charges of just 0.12 percent a year.
Baillie Gifford Managed Fund. While the Fidelity Index World is 99 percent invested in shares, Baillie Gifford Managed tones down the risk levels by putting 20 percent in bonds.
Bonds pay income with some capital growth, and help limit the damage when stock markets crash. “As the fund’s name suggests, it manages risk levels for smoother returns,” Khalaf added.
The Baillie Gifford Managed Fund still holds 80 percent of its portfolio in equities, so you should benefit from stock market growth as well.
Khalaf said this fund also targets technology stocks. “These have been successful for the past decade, but can be volatile along the way.”
Over the last five years it would have turned £1,000 into £2,005, doubling your money. Top holdings include Shopify, Amazon and vaccine maker Moderna. Annual fee: 0.40 percent.
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Invest in funds as part of your overall retirement plan (Image: Getty)
Personal Assets Trust. Khalaf recommends this fund for more conservative investors, who do not want to take too many risks with their money.
Personal Assets Trust invests in high-quality companies such as Unilever, Nestlé and American Express, and lower risk asset classes such as government bonds, cash and gold.
“It is run with conservative investment principles, and is designed to minimise losses in falling markets,” Khalaf said.
Inevitably, performance has been lower as a result, with the fund up 33 percent over five years, turning £1,000 into £1,330. It has a higher annual fee of 0.75 percent.
Personal Assets Trust will appeal to those who want stock market exposure but like to sleep at night as well.
As always when investing, you should only put money in the stock market if you plan to leave it there for a minimum of five years. Ideally, much, much longer.
That allows you to ignore short-term volatility and benefit from the long-term outperformance of equities.