ISA season: what now for the pandemic novice investor?

Two years on from the first Covid-linked market sell-off, interactive investor considers the next steps for fledgling investors.

• interactive investor has a range of Quick-Start funds for beginner investors (analysis and monitoring by Morningstar).

A key pandemic investing theme has been the surge in young or first-time investors dipping their toe into the world of investment for the potential of inflation-beating returns.

21 February marks two years since the first coronavirus-related market sell-off and for many, there is a sense of ‘what now’, as the investment landscape has changed considerably since the start of the pandemic.

Worries over the nature of Covid have subsided significantly (for now at least), with ballooning inflation, higher interest rates and the tech wobbles marking the start of the year perhaps taking over.

To say first-time investors have had a roller-coaster ride of a pandemic is an understatement. More than half the FTSE 100’s initial 33% plunge was recovered in just three months, before 1,000 points were handed back over the summer. The market enjoyed ‘Pfizer Day’ on 9 November 2020, and after some ups and downs since, January 2022 has been a month to forget for growth and tech investors.

For first-time investors who want to spread their risk more broadly (hopefully for a less stomach-churning ride), and with a range of risk profiles in mind, interactive investor has a range of QuickStart funds for beginners (analysis and monitoring by Morningstar). All are low cost, with active, passive and sustainable options.

ACTIVE/SUSTAINABLE

BMO Sustainable Universal MAP Cautious.The lowest risk of the three BMO funds. It targetsan annualised return of 2% above inflation over five years and can hold as little as 20% and as much as 60% in equities.

BMO Sustainable Universal MAP Balanced. The medium-risk option.The fund targets an annualised return of 3% above inflation over five years. The fund can hold as little as 30% and as much as 70% in equities.

BMO Sustainable Universal MAP Growth. The most adventurous, higher risk of the three but with potential for higher gains. The fund targets an annualised return of 4% above inflation over five years and can hold as little as 40% and as much as 80% in equities.

Bear in mind that each target for the funds is just a target and not guaranteed.

PASSIVE

Vanguard LifeStrategy 20% Equity - for shorter-term goals (3-5 years)

Vanguard LifeStrategy 60% Equity (for 5+ years)

Vanguard LifeStrategy 80% Equity (for 5-10 years)

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Many of those who got their first taste of investing during the pandemic may have a sense of ‘what now’. Some invested on the back of the FOMO hype train that saw the share price of US video game retailer GameStop (NYSE:GME) skyrocket and triggered the ‘meme stock’ phenomenon. Others did so because they always thought investing was a sensible thing to do, but never found time or the inclination to get started before the pandemic. Whatever the case, many will be contemplating their next steps.

“There are a number of simple things novice investors can do to ensure a portfolio is sensibly structured. The key is to know why you are investing in the first place, how long for and your tolerance for risk – i.e. how bumpy a ride are you prepared to take as the financial markets inevitably ebb and flow? This is when you need to stay disciplined and focused on your long-term goal.

“The challenge for new investors, particular amid the current level of market volatility, is avoiding knee-jerk reactions and sticking with your convictions and remember that investing is for the long term (five-plus years) can make all the difference.

“Also, a well-diversified investment portfolio is a must. It helps to cushion the occasional shocks that come with investing in a single asset class or region. It is easy to be overwhelmed by the sheer number of investments available. If you're new to investing, or simply don’t have much time on your hands, multi-asset funds are good one-stop-shop solutions.

“They split your money across a mix of different types of investments, but mainly shares and bonds. The bond exposure can take some of the sting out of stock market volatility. Having exposure to different assets can help to spread investment risk.”

Invest regularly rather than all at once

Myron Jobson says: “Some novice investors may be waiting for a better time to invest in the market, but the truth is no one knows when that might be - and there is a good chance that you would be unaware when that time comes.

“An alternative for nervous investors, or those without lump sums to spare, is drip-feeding your investments on a monthly basis. This helps to mitigate investment risk and smooth out the inevitable bumps in the market, buying fewer shares when prices are high and more when prices are low. It is a process known as pound-cost averaging - interactive investor offers a free regular investing service to help you with this.”

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “We believe that our Quick-Start funds are the best of the best in the multi-asset fund universe.

“The Vanguard LifeStrategy range stands out for its clear and defined strategy, low-cost, and strong long-term track record of outperformance since inception in 2011. The range has the most consistent risk-adjusted returns relative to peers.

“Our actively managed options, from the BMO Sustainable Universal MAP range, are low-cost and have a sustainable overlay reviewed by an independent Responsible Investment Advisory Council – although it is still important for investors to make sure any ethical offering matches their own values.”

Tips for beginner investors

Interactive investor has a Knowledge Centre for beginner investors

The QuickStart range – performance comparisons (annualised) to end January 2022

Source: ii using Morningstar. Past performance is no guide to the future and the value of investments can go down as well as up and you may not get back the full amount invested.