The credit crunch and turbulent financial markets have left ordinary investors even more distrustful of the industry than usual. Nine out of ten of the investors who responded to a recent MoneyWeek survey told us that they have taken more control of their financial affairs since 2008. And nearly half of them said that they have given up on independent financial advisers (IFAs) entirely: they manage their portfolios alone.
But if you are one of those who has decided to go it alone, you need to make sure that you are doing so as cheaply as possible. Owing to the initial fees and annual management charges you pay on unit trusts, the trading fees you pay with shares and investment trusts and, of course, the taxes you pay on almost everything, investing can be an expensive business. And that’s before an IFA creams off some more of your hard-earned cash. However, with a little planning, you can go some way towards cutting costs and maximising your profits.
First, keep your tax bill down. You can invest up to £10,200 through an Isa and any profits you make are free of income tax and capital-gains tax (CGT), so make sure you do so. An Isa isn’t an investment in itself, simply a wrapper within which you buy and sell shares and funds. You can set up your wrapper via almost any broker, but do be aware that not all shares are eligible. Aim-listed shares can’t be put in your Isa, for example, and some foreign investments are also excluded.
When it comes to picking your funds keep as close an eye on costs as you do on performance. Initial charges can be as much as 5%. Annual fees, which can run to 2% on some funds, whittle away at your returns too. Invest £10,000 in a fund that grows at 7% a year with no charges you’ll have £14,000 in five years. Pay 2% a year and you’ll only have £12,667.
So have your Isa or trading account at a fund supermarket, such as Hargreaves Lansdown or Best Invest. These companies tend to cut initial charges and offer discounts on the annual charges of most funds too.
Another way to cut fees is to avoid actively managed funds and opt for index trackers or exchange traded funds (ETFs) instead. These don’t have to fork out for overpaid fund managers and research teams, so they can charge much lower rates – annual charges on the cheaper funds can come in at as little as 0.3%.