If your client is thinking about investing in an Isa for the first time, he might feel daunted. Where does he start? What should he invest in? How is investing different from saving or gambling? These are probably just three of the most common questions novice investors may ask themselves, and which you must help them with.
Before starting out investing the client needs to set a clear goal of what he wants to achieve. Is he investing for something specific, such as retirement or his children’s school fees? Is he just looking to grow his money? Or is he looking at taking an income from his investments? Deciding what he wants will help him decide what risk he can take, and what he should invest in.
Whatever the goal, your client must bear in mind that investing is not for the short term. He should invest for at least five years, and preferably longer. Investing over the long term gives the investment time to perform and helps smooth out any swings in the stock markets.
Risk
The investor must decide how much risk he is willing to take. This is a tricky one, because attitude to risk can always change, depending on age, lifestyle and surroundings. The most straightforward test is how much risk the client can tolerate without losing sleep over concerns of an investment falling in value. The amount of risk the client should be taking also depends on what he is investing for and how long he can leave his money invested. For example, if he is in his thirties and investing for retirement he will be able to take on a fairly high risk, as the long timeframe will give him plenty of opportunity to recoup any losses. Attitude to risk is measured in how much the client is willing to lose, because he would be willing to risk more to make a greater gain. The attitude to risk will most likely change as the client becomes a more experienced investor, but he should be warned – over-confidence is rife among both experienced and inexperienced investors, and can lead to losses.
Research
Before he decides to start piling money into various funds or individual shares it is important that your client does his homework. He should read up about the different types of asset classes, the pros and cons of Isas, and different types of investment styles. The client should make notes and then sit down and consider what he wants from his investments and how each asset class and fund style fits in with his objectives. At this point, a new investor is already likely to feel overwhelmed by the sheer amount of information, and will need time to digest the information before proceeding.
Setting an asset model
Few investors actually do this, but it is a good way to manage one’s investments, maintain the attitude to risk, and identify areas from which to take profits and those which may be worth investing in. An asset model is basically the proportion of the portfolio the investor wishes to hold in any asset class, for example: 30 per cent in international equities, 40 per cent UK equities, 20 per cent bonds, 10 per cent absolute return. Your client can use this asset model as a reference point from when he first invested, allowing him to check how far his portfolio has moved.
