Congratulations, you’ve done the hard work! You started an investment plan, put it into a tax-efficient Isa, and now your savings are firmly into five figures.
Your hard-earned money is no longer “sitting on the couch”. But how do you think about building the investment up to a financially fit six figures?
First, be honest with yourself. Are you still a bit overweight in cash? Some investors may have surplus funds earning very little in cash, or a lump sum coming in the form of a bonus, to add to the investment plan. If you’re in this fortunate group, you may have plenty of cash ready to invest in shares, bonds and funds.
Next, don’t run before you can walk. Making regular long-term investments usually requires regular long-term earnings. So remember that securing and retaining a good job is central to your financial regime, particularly in these uncertain times.
Third, fully accept that the financial equivalent of working towards a six pack is not something that will come quickly. Any investment that claims to make you rich in a matter of months is highly speculative and could land you with the financial equivalent of at least a muscle sprain and possibly a serious injury.
It’s helpful to look to the growing army of Isa millionaires for inspiration — 2,000 of them, according to the latest HM Revenue & Customs figures — and at how they have achieved their impressive seven-figure sums over several decades.
But the average age of 72 among Interactive Investor’s 983 Isa millionaires is a reminder that investing is a marathon, not a sprint. All the investments you make today should be “buy and hold”, stashed away for at least five years.
Any professional athlete will tell you the key to crossing the finish line ahead of the pack is the consistent habits they developed in practice. So, think of a short-term investment win as a pair of new running shoes — lovely to have, and somewhat helpful in achieving long-term goals, but it’s mainly the training which gives the best returns.
Adding to your investments on a regular or monthly basis is a useful tool to propel you on your way. The most powerful drivers are your investment choices and asset allocation — how you diversify your money to spread the risk of everything falling at the same time.
With £10,000 of investments, you probably already have one or two collective investment funds in the pot.
Yes, a simple, low-cost multi-asset fund could be your one-stop solution forever, but in practice, once you have more than £10,000 to invest, you’re likely to want to expand away from one or two funds. But should you add more funds or buy direct shares and start taking higher risks with some of the money?
Many investors prefer to diversify between fund management houses just in case there’s a failure, such as the collapse of manager Neil Woodford’s Equity Income Fund. Many people combine a handful of collective investments with direct holdings in UK and international shares. If you’re doing this, you’ll need to check for overlap, making sure that the collective investments aren’t holding your chosen shares.
The portfolios of Interactive Investor’s Isa millionaires have been powered by investment trusts such as Alliance Trust and Witan, which are all globally diversified portfolios of shares. Top shareholdings are dominated by FTSE 100 blue-chips, particularly oil, pharmaceuticals, banks and telecoms — holdings that could help these investors in the race against inflation.
While it’s inspiring to look at how the very wealthiest have got there, the assets that have done well in the past decade, such as tech stocks, won’t necessarily do well in the 2020s.
You’ll also need to think about your risk profile. Investment trusts, for example, often tend to outperform funds in a rising market due the ability to “gear” or borrow money to invest. But in a falling market, gearing can also enhance losses. You may need to accept a rockier ride over the years of investing.
It’s possible to construct a portfolio aiming for long-term growth with around 10 collective investments, such as funds and investment trusts. This should include investments that focus on UK and international shares, usually the largest portion of a growth portfolio, but have smaller amounts in funds or trusts that specialise in bonds, commercial property, gold and private equity — major asset classes that can spread your risk.
Try to be smart about the type of collective investment that you hold.
For investments that are less liquid, which means they can’t be bought or sold quickly, such as commercial property, rather than a fund, you may want an investment trust such as BMO Commercial Property. Investment trusts find it easier to hold assets that are harder to buy and sell because they don’t have to deal with money going into or out of their portfolios.
And for some types of investments a low-cost tracker fund might be better, for example in larger company US equities. Investment guru Warren Buffett is fond of recommending an S&P500 tracker fund.
All the big investment platforms have recommendations of the best-in-class investments in different asset classes, and how to put them together in model portfolios, which can help you with your research.
But you’ll also need to do some ongoing maintenance of your investments.
Some fitness apps such as Noom use psychology to get the weight off and focus on forming good habits. One of these is checking in on your weight every day. But don’t feel that you should check your portfolio every day. Good investing can be done even if you’re short on time.
Do schedule a review at least once or twice a year. This is your opportunity for a bit of rebalancing if the portfolio looks skewed to one asset class.
If you have the time, maybe check in once a month on how it’s performing. But checking too often can be counterproductive — it may just make you worry about the ups and downs of the markets.
Your emotional response to a rise or fall in price may drive you to buy or sell an investment when it may be better to stick to the plan and hold on for the long term. So, like all steps to fitness, reaching your goal will take some mental toughness.
Moira O’Neill is head of personal finance at Interactive Investor
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