We are frequently asked by novice investors to recommend funds for their first investment. Sound interesting? Be careful. Don’t run before you can walk!
Many novices approach investing in entirely the wrong way. They often jump straight in, investing in eye-catching funds without any process or discipline. Men are often the worst offenders here.
Others tread too cautiously but can still be swayed by a compelling advert or marketing campaign.
Our strong suggestion for novice investors is that you keep it simple (the KISS principle) and focus on one or two funds as part of a process that you apply with discipline.
This doesn’t mean you must accept mediocrity, on the contrary. For example, even if you are cautious, there are some outstanding cautious funds.
If you want to keep it simple, then your hunting ground should be more limited. You will want to select funds from fund categories or sectors where the manager has the ability to invest broadly across different asset classes, doing the legwork for you. In this example, we’ll limit ourselves to these three fund sectors, dictated by how you characterise yourself:
- Cautious investor? Try Mixed Investment 0-35% Shares sector
- Relaxed investor? Mixed Investment 20-60% Shares sector
- Ambitious investor? Mixed Investment 40-85% Shares sector
Yes, the names of the sectors are horribly uninspiring. A little explanation helps.
For example, the most popular is Mixed Investment 20-60% Shares. As the name suggests such funds contain between 20% and 60% in equities.
We suggest this sector is appropriate for a novice investor who is informed about the downs as well as the ups of the stock market, and is comfortable with this. The more cautious and ambitious investors sit either side in Mixed 0-35% and Mixed 40-85%.
Lastly, you need a process to select funds (and the discipline to apply it, consistently). You can see our recommendations below for each category of investor based on our Vintage Fund Ratings, which judge a fund by the consistency of its long-term performance.
We recommend that you review these funds annually. Their quality is such that you shouldn’t need to change them annually, but an annual review should be part of your discipline. We update this analysis annually. If you register, we will also keep you engaged by automatically prompting you every 6 or 12 months to check that everything is going according to your plan.
Don’t adopt a “buy-and-forget” approach. Inertia is one of the biggest roadblocks to you making the best possible gains, because even the very best funds will go off the boil eventually.
Last but not least, notice how these top-rated funds have either a “distribution” or “income” tag. This is no coincidence. Unless you want the income paid out, it is reinvested for you. This provides a significant boost to the growth of your fund, and is a very important early lesson for an investment novice. As Einstein said: 'Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.'
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