How can we demystify investments for young people?

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The uncertainties, the complicated fees, the potential risks – no wonder young people are put off investing. I was invited to try out a new platform that aims to make this route clearer and easier for those that have the wherewithal. Does it pass muster?

Iona Bain

Daunted by investing? I don’t blame you.

The world of stocks and shares is a mystery to most young people. Understandable for so many reasons – they have very little disposable income to risk on turbulent markets. Even those young professionals who feel slightly better off think it’s out of their depth. They (rightly) suspect that they would have to pay a financial adviser to help them make a good fist of it. Otherwise, it’s the preserve of geeky City types who obsess over the share pages in newspapers and make Elvish-speaking fans of the Hobbit look tame.

Of course, investing isn’t for the fainthearted or those who need every penny they can muster. It is strictly for those who have mastered basic saving, have some secure assets (like a house) and disposable income to invest wisely. It is also inherently risky – not in any way like gambling, of course, but it does require serious investors to make educated judgements about the future direction of all things economic, from the yearly results of companies to the performance of whole economies.

Even the most seasoned investors can get burnt in turbulent markets, such as the kind we’ve experienced in the past three or four years. You don’t necessarily get back what you put in, and a wrong call could cost you money that you simply can’t afford to lose.

That’s why we need young people to prioritise saving money into safe deposit accounts wherever possible, even if it’s just £10 or £20 a month. But those who have diligently saved throughout their twenties may start getting itchy feet and wonder WHERE ALL THE DECENT RETURNS ARE!

The banks don’t give you very much for your troubles, that’s for sure. There are only FIVE accounts on the market that beat inflation if you’re a basic rate taxpayer, according to the Savings Champion website.

So if you have enough savings and much-needed wisdom in the tank, you may be able to stomach the possibility of losing money for the (potentially) much better pay-offs from investing. Also consider that long-term investing is actually boosting the economic health of the UK and other countries immeasurably.

You invest in shares, either on their own through a stockbroker or collectively through unit funds and investment trusts, and thus put the punch in the economy’s fist, to paraphrase Winston Churchill. Furthermore, a canny investor will seek out those funds that offer a dividend, which is what many companies pay in return for your investment – a sweetener to keep you in the game. The UK stock market alone could see dividend yields rise by between 5 and 10% in the next three years, according to investment house JPMorgan.

But even if you want to dip your toes in the water, you probably have NO IDEA where to begin.

With a bit of research, you may gain a rough idea of ‘hot’ markets, assets and shares to grab a slice of. But how do you adequately weigh up the long-term risks of different funds?

The theory is that going for more ‘racy’ funds (which makes the whole process sound a bit “Carry on Investing”, I must say) will potentially yield bigger returns in good times, when markets pick up more confidence, but the potential for losses is also much greater. On the other hand, more ‘cautious’ funds (i.e. the vicars and tea approach) will limit, though not entirely eradicate, this potential for loss but won’t match their more ‘adventurous peers’ when markets improve. But do industry labels like “cautious” and “adventurous” give enough indication of what to expect?

Another question is the true cost of investing. The investment world has been accused of disguising the real and often high price tag with various fees that are hard to compare.

That is why I accepted the invitation to try out rplan’s new virtual portfolio. Anything that makes investing a little bit less messy for the younger generation is worth a try!

rplan, for any novice investor out there, simply allows you to pick and monitor whichever funds you’re confident enough to invest in. It is one of many platforms out there offering this service. But it’s aiming to go further than its competitors. It wants to make investor’s lives easier by giving the information EVERYONE wants to know about funds:

  1. A) how ‘risky’ they are,
  2. B) how much they cost and
  3. C) what their performance is like.

Once you sign up, you’re taken to your dashboard, where you can ‘analyse’, ‘invest’, ‘plan’ and ‘share’. I’m a little put off by the scribbled “full functionality” sign at the top right hand corner, pointing to ‘Plan’ – it’s a little bit of website gobbledegook that belies an otherwise very accessible set-up.

The Plan function is particularly useful if you’ve got a specific goal you want to invest for, like a house deposit or retirement fund. It automatically figures out how much you should be contributing per month, which should indicate whether you can afford the commitment or need to readjust or even reassess altogether.

It also gives you the option of investing within your ISA allowance of £11,280 (a must if you’re a taxpayer) and whether you want to pick your own funds or let the site’s specially appointed experts at Rayner Spencer Mills put together a pre-selected portfolio. What it doesn’t do is tell you whether your plan is feasible, and what kind of funds would be most suitable for this approach. The accepted wisdom is that an independent financial adviser is best-placed to guide you in this area. So if you are serious about using this platform, consult an adviser who can put together a workable plan for you, particularly if you know little about investments.

If you go it alone (brave old you!) you get to choose from an almost overwhelming basket of funds, but handy slider tools at the side of the page *should* allow you to narrow down your choices based on risk (from 1 to 7, with 1 being safest and 7 being riskiest), cost and performance. However, some funds don’t supply the necessary information on cost and risk for you to compare each and every one, a slight fly in the ointment which rplan is coping with as best it can.

Furthermore, I couldn’t actually get the sliders to work when I used it! A technical gremlin that I’m sure will be ironed out in time…

Otherwise, your chosen funds are highlighted very clearly on your portfolio page thereafter, making it clear wherever possible just how much they are costing you on a TER basis and what the risk factor is. If you’re very clear about which funds to go for, having swotted up on the best sectors and assets to go for, you can cut to the chase by using the Analyse or Invest tools on the dashboard page.

rplan points out that no other platform is quite so clear on the burning issues of cost and risk – quite so. However, it can’t make the task of picking funds any easier, nor can it offer the best possible overview of each fund, making it ultimately impossible to judge them all equally. That is the biggest flaw that the fund industry needs to rectify. The ideal scenario would be for each fund to consent to a standard, transparent measure of risk and cost. Only then will investors, young and old, trust that the industry is competitive and worthy.

Nonetheless, this new service is giving funds little place to hide – and quite right too. It helps to push through the dense, complicated world of fund platforms by emphasising what really counts. That alone makes things easier and clearer for any young professional who has sought advice on their finances and feels investing is the next logical step.

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