The smart woman's guide to investing

Women make better investors. Study after study shows that we outperform men, as our cautious, long-term approach to money management pays off. We ask more questions, take fewer risks, and are less impulsive. Yet a lack of confidence, and that very risk aversion, mean that many women are missing out on the chance to get better returns than they get at the bank.

According to the Association of Investment Companies, in the five years to October 2017, the average investment company returned 93.5%, almost doubling investors’ money. True, we are warned time and again that past performance is no guarantee of future performance, and that the value of investments can go down as well as up. But if you had invested through one of these in 2012, it could now be worth almost twice as much, which should make you think.

And yet, according to official figures, while more women than men have opened a ‘safe’ cash ISA (individual savings account), paying meagre interest, only 870 women hold ‘risky’ stocks and shares ISAs, with the potential for higher returns, compared with more than a million men.

This despite the fact that we have a greater need than men to take the plunge. We earn less over a lifetime, so have less money to save for later life; we face a pension pay disparity, with women retiring on an average £14,300, compared with £20,700 for men, and we tend to live longer, so our finances need to stretch farther.

Investing in the long term can’t address financial inequality, but it can overcome the problem of inflation eating away our reserves, and the risk of running out of money in later years. So why not give it a try?

The answer, for many, is ‘no thanks’. According to recent research, we Brits are so fearful of committing to a long-term investment that, given the choice, many of us would rather jump out of a plane. What we fail to realise is that by not taking a risk, we are actually taking one, as inflation erodes our spending power.

Many of us are so fearful of committing to a long-term investment that we’d rather jump out of a plane.

Mind the gap!

A combination of low interest rates and rising prices means that many of us are getting a negative return on our life savings. In November the Bank of England increased the base rate from 0.25% to 0.5%, but financial providers did not rush to pass this on to savers in the form of higher interest rates. Meanwhile, inflation is running at around 2.8%.

If someone tried to sell you an investment that guaranteed a negative return of 2.8% would you buy it? Obviously not. Then, suppose you were told that if you invested £10,000, after five years you would get back less than £9,000. You’d think nobody in their right mind would choose such an investment. Yet anyone with savings has a deal something like this.

Bear in mind: over 25 years of retirement, if you do not invest, you could see your money more than halve in real value.

Bear in mind: over 25 years of retirement, if you do not invest, you could see your money more than halve in real value.

Lose no more time!

Perhaps you think investing is something you can do later, when the need becomes pressing, or you leave that kind of thing to your husband or partner. However, the earlier you learn the ropes, the better, and all of us, single or otherwise, should be investment savvy. Statistics show that, when couples seek financial advice, in almost three-quarters of cases it is the man who has the greater involvement and responsibility in the process. But what if you divorce or separate, or if your partner dies or becomes too ill to make decisions? It is at just such stressful times that many women have to take control of their finances – hardly the ideal stage in life to take on responsibility.

Fortunately, no one need go it alone. Most independent financial advisers offer a free introductory meeting. You do not have to make any decisions on the spot. You won’t have to sign away all your money. If you feel pressured, you can walk out. But you can find out what an adviser can do for you. Visit unbiased.co.uk to find one near you.

You won’t have to sign away all your money. If you feel pressured, you can walk out.

First principles

If you want a chance of at least keeping pace with inflation, you do need to consider investing.

But that doesn’t mean you have to take a huge risk. Start small. Some fund platforms (which are basically online investment shops) allow you to start investing with just £1 (half the price of a National Lottery ticket, and you are far less likely to lose the lot). That said, you should generally consider around £50 a month to make investing worthwhile and follow a few golden rules.

Some fund platforms allow you to start investing with just £1 (half the price of a National Lottery ticket, and you are far less likely to lose the lot).

Keep something back. You probably have money tied up in property, and perhaps a pension. You still need these, and should keep some of your savings for emergencies.

Delegate. You don’t need a large portfolio to afford someone to manage your money. He or she will almost certainly choose some collective investment vehicles (see below) and spread the risk to the money pool across a variety of investments.

Diversify. On the same principle, if you’re making the decisions, invest in a number of funds, as some will perform better than others. Don’t put all your eggs in one basket.

Think long term. Investing should be considered at least a five-year commitment, to give your money time to grow and ensure you can ride out market falls (although you can usually withdraw it at any time without penalty).

Keep your cool. Buying at the wrong time is regrettable, but the cardinal error is to sell at the wrong time. Investments rise and fall in value. However, you only lose if you sell for less than you bought. Hold on and sell when you can make a profit. Say you invest £10,000. The markets plummet and your investment is worth just £7,500. Yet over the next five years the markets recover and your investment is then worth £12,500. If you had panicked and sold, you’d have lost 25%, but by sitting tight you have gained 25%.

Look at tax-free options. Invest via an ISA and you can shelter £20,000 a year from the tax man. Another great thing about ISAs is that you cannot have a joint one. A perfect excuse to set up your own and start your own investment portfolio.

Investing should be considered at least a five-year commitment to give your money time to grow and ensure you ride out market falls

Get started

Off-the-shelf portfolios

The easiest way to start investing is to buy an ‘off-the-peg’ investment portfolio, a collection of assets packaged by expert fund managers. They will choose the mix of investments for you, so all you have to do is to decide the level of risk – from cautious to adventurous – and whether your priority is growth or an income, then possibly commit to paying in each month (minimum amounts vary).

As you add to your portfolio and see how it works, you will become more confident about having at least some of your savings working for you in the stock market.

There are dozens of online platforms such as Saga Share Direct, which offer ready-made portfolios.

The advantages are:

• You can generally start with £500 to £1,000 if you buy from one or other of the online platforms. Check that the platform is regulated and genuine at https://register.fca.org.uk.
• You don’t have to make any ongoing investment decisions, they are all taken for you.
• The risks are lower than those of buying a few individual shares – you will own a portfolio spread across a wide range of investments that may contain individual shares, bonds (more about those later) and even property.
• You can open an account in minutes and track the value of your investment online (remember, values rise and fall continually so don’t panic if you see a dip).
• You can add to your portfolio when you want, and cash in some or all of your money if you need it.
• Providers may offer a ready-made portfolio within an ISA, which allows your money to grow tax free (invest up to £20,000 every tax year to take optimum advantage of the tax-free allowance).

Build your own portfolio

If you are not comfortable with committing £500-plus to an investment, then consider creating your own portfolio instead. Look for recommendations – most online platforms have sample portfolios – and start with a small sum in each fund. For example, you could select three that have different investment goals. Perhaps one UK-based fund, a global fund and a very cautious real-return fund that aims to give a positive growth whatever the market conditions.

• You might start with, say, £25 a month per fund.
• Choose three or four funds to spread your risk – or begin with one and gradually add others once you have built up a decent sum (say £250 in the first fund, and so on).
• Follow the recommendations of the fund platform – you can read these yourself to learn more about how each fund works.
• Add additional funds/stop paying in as investment opportunities change.
• Pay no initial charges – most fund platforms do not deduct an initial fee but charge an annual fee of around 1%.
• Cash in some/all of your money if you need to, without penalty.

Tricks of the trade

You do not have to be an expert to benefit from these tips:

• Rather than investing a large lump sum, drip feed into the market with a monthly investment. The great thing about this approach is that it is less risky. If you invest a large sum before a market dip, you instantly lose. Drip feed and over time you will find your investment performance is better.
• Always spread your risk (see above). Most of us have far too much in UK shares. If you are investing online, you can usually analyse your portfolio free to see where your money is invested. A range of investments such as smaller as well as larger companies, different types of investments (including bonds) and different geographical areas, reduces overall risk.
• Reinvest your income. Yes, shares generate an income. Known as a dividend, it is paid out of profits. You can take the cash, but over the long run, reinvesting this income (to buy more shares) results in the bulk of your returns from the stock market. According to one analysis, more than half of the US stock market returns since 1871 have come from reinvesting dividends.
• See falls as opportunities. Try to view investments like anything else you might buy. Look at a big fall as a sale – ‘1/3rd off shares!’ – and a time to buy, rather than to sell.

Learn the jargon

This is a bit like reading ingredients on a food package. There are lots of acronyms and names you might not know, but grasping the basics (like understanding the fat and sugar content) will help you to learn about investing.

Your portfolio will be split into different assets. Some of these are obvious, for instance ‘cash’, and ‘property’ – which generally means commercial rather than residential property.

Stocks and shares are more-or-less the same. To hold stock in a corporation you own shares. There is no financial or legal distinction between a stockholder and a shareholder, and the words are used interchangeably.

Equities are stocks and shares. The equity market and the stock market are one and the same. When you buy a company’s share, you gain equity, or ownership rights, entitling you to a percentage of profits in the form of dividends.

Fixed-rate bonds are the other common ingredients. These are like an IOU. A company (issuing a corporate bond) or government (issuing a government bond, or ‘gilt’), agrees to pay a set rate of interest in exchange for your lending them some money for a set length of time. At the maturity date, your capital is returned to you, provided the bond issuer hasn’t gone bankrupt. In the simplest terms, let’s say you buy a £100 bond to help fund a business. It pays a fixed income of 6%. Inflation is the enemy here, as it erodes the value of income and capital, but you still do far better than you would if you left your money in the bank. However, not all bonds are equal – some are more risky but can pay up to 15%. Some are less risky and pay lower returns. Also, as they are traded like shares, their value can rise and fall: sell them and you could gain or lose. A fund manager can advise on bonds to buy.

Commodities are tangible things such as oil, copper, wheat and gold, in which you may invest indirectly.

Hedge funds, which sound scary, use complex alternative investment vehicles, such as derivatives (securities with a price dependent upon or derived from an underlying asset or assets) and leverage (borrowed capital) as a ‘hedge’ or means of making money regardless of whether the market is on the up or down. They are bit like the preservatives in food – you might not like the idea of eating some strange-sounding chemicals, but you need them for a bit of stability. Hedge funds are for sophisticated investors. Your portfolio manager will probably invest in these different assets through pooled or collective funds.

Safety in numbers

Collective investments are ideal for beginners. If you buy an off-the-shelf portfolio it will probably contain a dozen or so of these. Basically, they pool the cash of a large number of investors. A fund manager then invests on their behalf. By pooling your cash you can buy more investments (equities, bonds, property etc), so you can spread your risks and costs. The two most popular vehicles are unit trusts (UTs) and Open-Ended Investment Companies, which, though similar, have certain differences. Investment trusts and exchange traded funds are other options.

Unit trusts (UTs) A fund manager invests in, for example, bonds, shares, property, commodities, splitting the funds into units of equal value, which you can buy. The cost of a unit depends on the net asset value (NAV) of the fund’s investments, and is priced once a day, unlike shares, which are continuously priced through trading hours. The funds are ‘open-ended’, with managers creating new units for new investors and cancelling them when investors opt out. You will usually have a choice between income units and accumulation units – between taking pay-outs and reinvesting in the fund.

Open-ended-investment companies (OEICs) These operate in a similar way to unit trusts, with the slight difference that the fund is run as a company, creating and cancelling shares rather than units as investors opt in and out. As with unit trusts, the fund reflects the underlying value of assets in which a fund manager has invested.

Investment trusts These are investment companies quoted on the stock market and designed to generate profits by investing in shares of other companies. Once again you own a share that reflects the value of all the underlying investments they hold. The difference is that the number of shares is fixed, so that an investor can buy in only if another investor is willing to sell. Supply and demand determine the share price, so if demand exceeds supply the share price might be pushed to a premium over the NAV, but when demand is low they can trade at a discount, adding a level of risk. Because sellers are matched to buyers, managers can resist being forced to sell investments in a falling market when investors want to move into cash, so the capital base is less volatile. Investment trusts can retain up to 15% of income in a year, so they can smooth out the paying of income by retaining something for lean years.

Exchange traded funds (ETFs) These track the performance of a specific index, such as the FTSE100 index of the top 100 shares in the UK. They own the underlying assets, and ownership is divided into shares. Shareholders are entitled to a percentage of profits, but do not directly own the fund’s underlying investments. Prices change throughout the day as ETFs are bought and sold.

Raise your game

Owning an off-the-shelf portfolio or three or four unit trusts is a great beginning, but if you really want your money to work for you, you need to see the bigger picture.

Get a financial health check

If you have only a small portfolio you may be able to get all the information you need online, saving the cost of professional advice, and learning as you go. But let us say you (and maybe your partner) have a diverse range of investments – a property (or two), money invested in pensions, savings and Premium Bonds, unit trusts, ISAs and tangible investments such as antiques, even gold coins. Some of this might be put to better use in the right investment portfolio.

This is where it pays to have a financial health check (see unbiased.co.uk to find an impartial adviser). According to a study based on 5,000 individuals and households across the UK, those who took investment advice between 2001 and 2007 were, by 2014, on average more than £40,000 better off than those who did not.

Ask for an initial appointment (often free) and see how comfortable you are with talking through your money matters. If you think you will benefit from this advice, you can then take it further. On average an initial review of your finances costs around £500, or £150 an hour.

Warning: Never take up an investment you are ‘sold’ via email, over the phone or in the post. It might be a scam. Check the Financial Conduct Authority website at https://register.fca.org.uk to verify that a firm is authorised.

Keep your eye on the ball

While investments should be seen as long-term – at least five years– that doesn’t mean you have to hold the same investments for all that time. It is important to monitor your portfolio every six months to a year to make sure that it is still meeting your investment goals. If you employ a financial adviser they can do this for you. However, once again, cost is a factor. If you have only £10,000 to invest, a fee of £150 an hour every year will eat into your returns.

• Make the most of the online features of your portfolio provider to track performance.
• Remember you can usually transfer your money from one fund to another without penalty. Consider this for investments that are not performing well or no longer meet your needs.
• If you are investing through a tax-free ISA and wish to switch providers, fill out an ISA transfer form before you move your account; if you withdraw the money without doing so, you won’t be able to reinvest that part of your tax-free allowance.

Compound your gains

As we have already seen, the secret to long-term investment success is compounding. Reinvesting any income (share dividends or yields from bonds) will help your portfolio to grow so you can buy more investments and earn income on your income. However, the flip side of this is the compounding of charges – as your investments grow, so do the costs, since they are based on a percentage.

When shopping around, do not forget to compare costs. Even a small difference in the percentage charged adds up over time. You may think that 2% a year sounds like very little. However, if your investment grows by 6% a year over the next 25 years, that 2% would wipe out almost 40% of your final amount compared with the value of your investments if you had paid no charges at all.

Think ahead

An off-the-shelf portfolio may not on its own meet your long-term needs, which could be better served by a range of different investments. For example, you might consider a long-term growth fund for later life. Unlike an income fund, designed to provide you with earnings from dividends, a growth-fund is designed to grow your investment as much as possible over a longish time frame – perhaps 15 or 20 years. Income funds are generally seen as less risky. However, there is no need to be too cautious when you have such a long time frame. You can always switch your investments into lower-risk bond funds and even cash nearer to the time when you want to access your investments. That said, a fund to help your grandchildren might have just a five- to seven-year time frame. In this case a more cautious fund with a greater proportion in low-risk bonds might be more suitable.

The advantages of having several portfolios or funds to meet different investment needs are:

• You will further diversify, reducing your overall risk.
• You can afford to be more adventurous with some of your longer-term investments, gaining greater potential for higher returns.
• You can take less of a risk with investments you are going to need to cash in within the next few years.
• If one portfolio or fund does not perform well, it will matter less, provided you have others that are giving you good returns.

Your biggest asset?

If you have a company pension, it may be worth more than your house! In March 2016, when the average UK house price was £216,000, a survey of financial advisers found that, over the preceding year, the volume of transfers of final salary pensions had grown by more than 50%, with transfer values commonly in the £250,000-£500,000 range.

In the past there were two ways in which your pension pot could have provided you with an income in retirement, either through a company pension scheme, or by handing the lot over to an annuity provider in exchange for a monthly pay-out for your lifetime. However, changes in the rules have presented us with both more options and more risks.

If you have a ‘defined contribution’ pension, based on the money paid into the pot, from age 55 you can withdraw 25% of the total tax free, leave some or all of the money in the pot to grow further, take the whole in a lump sum or draw down income over time, buy an annuity (low rates have made this less attractive), or invest for maximum returns over what could be 30 or 40 years. If you are married or in a relationship, you need to discuss what happens to your or your partner’s fund. In the past, a significant number of retirees buying annuities failed to provide for their spouse – thus, when they died, so did their pension.

Remember, too, that there can be inheritance implications and tax liabilities. If you time your withdrawals, for instance, you should pay little tax.

The crucial advice is, as ever, to talk to a professional.