DIY investors looking for a helping hand with their portfolios face a confusing maelstrom of ready-made options, which risk leaving them hundreds of pounds out of pocket if they choose incorrectly.
For years, investment platforms operated as simple fund supermarkets, presenting investors with an array of thousands of funds and stocks from which to construct a portfolio.
But as the popularity of DIY investing has ballooned, platforms are falling over themselves to offer solutions to make investing easier.
The amount of money invested in the stock market via investment platforms has leapt by 20 per cent and then 12.5 per cent over the past two years alone.
Hundreds of thousands of new platform customers are investing for the first time and need help starting out.
Solutions range from ready-made funds where you buy a single all-in-one fund to model portfolios where you are recommended a number of funds to buy and manage yourself.
The offerings vary wildly. Some platforms offer ethical options, others ideas for investing for children. Some make recommendations based on their own in-house funds, while others pick the best from the whole market.
Used wisely, these tools can make investing simple, affordable and potentially lucrative. But navigating through the growing range of options can be bewildering and lead to expensive mistakes.
Do-it-all fund with a wide asset range…
Some investors have neither the time nor inclination to construct and manage a portfolio.
For these people, investment platforms have been developing ranges of ready-made funds that require no maintenance – they are rebalanced and reshaped periodically on your behalf.
Ready-made fund ranges are offered by providers including AJ Bell, Aviva, Barclays Smart Investor, Charles Stanley Direct, Chelsea Financial Services, Hargreaves Lansdown and Interactive Investor. You can hold them in an Individual Savings Account or general investing account.
Unfortunately, they go by different names on the websites of each investment platform. So you will need to tread carefully and inquire with your platform provider if you cannot find them.
For example Hargreaves calls them Portfolio +, Interactive Investor labels them Quick Start while Tilney Bestinvest has an Expert and Smart Range. Ready-made fund ranges appear deceptively similar.
Each platform offers between five and nine different funds to choose between, all with a low, medium and high-risk option. But don’t assume they are the same.
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For example, some platforms, such as Barclays Smart Investor, do not have options designed for investors seeking an income from their investments, while others do.
If income is important to you – as it is for many people in retirement especially – you may want to pick a range with an income option.
Some platforms offer ready-made funds selected from the whole of the market, while others choose to promote their own in-house funds. Hargreaves’ Portfolio +, for example, is made up entirely of Hargreaves Lansdown Multi-Manager funds.
Flows of money into these funds rose from £20.39million to £197million last year.
You will need to decide whether you are happy with your platform’s assessment that its own funds are best – or if you would prefer to have access to the full market.
Some platforms offer cheap, no-frills funds made up solely of equities and bonds – the core components of an investment portfolio.
For example, Interactive Investor’s Quick Start funds are built around the Vanguard Life-Strategy range, with varying proportions of equities and bonds depending on your appetite for risk.
Other platforms offer readymade funds diversified across a wider range of assets. This method can prove valuable at a time of market turbulence when alternative assets offer a ballast against equities and bonds.
For example, Tilney Bestinvest’s Smart range of five ready made funds all contain a six per cent holding of gold and 1.5 per cent of cash.
…or a portfolio based on appetite for risk
Some investors are happy to take on a bit more work themselves, but need direction. For these people, investment platforms offer model portfolios, which are funds designed to work in tandem to meet your investment goals.
However, once again you will need to tread carefully as they all have different names and are easily confused with the platform’s ready-made fund ranges.
At AJ Bell, they are called ‘readymade portfolios’, on Interactive Investor ‘model portfolios’ and at Hargreaves Lansdown ‘master portfolios’.
Platforms tend to offer between five and ten of these portfolios. To pick the right one, you will be asked questions about your appetite for risk and whether you are looking to grow your wealth or use it to produce an income.
According to your answers, you are presented with a model portfolio – a list of recommended funds and how much you should put in each according to how much you have to invest.
Some – such as AJ Bell – allow you to buy all of the funds in a model portfolio with a click of a button while others, such as Interactive Investor, require you to buy each separately.
Model portfolios are as easy to buy as a ready-made fund. The potential troubles come later on. When you buy a model portfolio, it should be optimally balanced and diversified. But before long, the composition of your portfolio will start to skew as some funds perform well and others poorly.
It is up to you to rebalance regularly to make sure that your portfolio still meets your attitude to risk and reward. That means selling some holdings and buying others, or tilting what you buy in future towards areas that have become under-represented.
Wealth platforms regularly update their model portfolios by removing funds they no longer rate and using new ones they are more optimistic about. You will need to keep an eye on these changes and decide whether you too wish to switch.
Holly Mackay, of investment website BoringMoney, says: ‘All is well and good when you buy a model portfolio, but the problems come down the track.
‘If the US stock market soars and the UK flops, as has broadly been the case in the last three years, then everything gets out of kilter.
‘And so you end up with a disproportionately high allocation to US shares and a lower one to British shares. You can rebalance everything, but it’s a bit fiddly to do.’
How much will they cost and what do you get?
Ready-made funds and portfolios can take a lot of the stress out of investing. However, using them successfully is not as simple as platforms might have you believe. Here are some key questions: