Investment platforms: a short guide
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham, Lincolnshire or other local offices.
In today’s digital world, it has never been easier to open an investment account – even with a small amount of money – and start building a portfolio. Yet is “DIY investing” a good idea, and if so, when is a good time to open an account? What should you look for in an online platform and which pitfalls should you watch out for? Below, our Grantham financial planners at Castlegate offer some answers and insights. We hope you find this content helpful. If you want to discuss your own financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
The pros & cons of “DIY investing”
One advantage of using an online investment platform is that it gives you a chance to learn the “basics” of investing. You could commit a small amount of money that you can afford to lose (e.g. £200) or even just practice with a “virtual account”. This helps you experience the realities of market volatility and gauge your reactions to it. Using a platform also familiarises you with the jargon and fees used in the investment world.
However, the main danger of DIY investing, using an online platform, is that you commit too much capital and try to “time the market”. This often ends up with investors losing money as the emotions involved (e.g. loss aversion) lead to poor decisions. There can be a great temptation to obsessively log in and “tinker” with your portfolio, racking up needless trading fees which eat into your returns.
When should I start investing?
To compete over a wide UK customer base, investment platforms increasingly allow investors to get started without requiring large up-front deposits (or big monthly contributions). This means that, theoretically, an investor could start building a portfolio at any time – perhaps with as little as £100 to open an account. Regular contributions help get you into the habit of investing and treating it as a crucial “expense” rather than something optional.
However, if you have costly debts, such as personal loans and unpaid credit cards, then it is usually best to focus on paying these off before starting a portfolio. This is because the returns you hope the generate from the latter are unlikely to beat the interest rate savings achieved by paying down your debt. A 6% average return from a portfolio, for instance, pales compared to a 22.2% APR on today’s typical credit cards.
What should I look for in a platform?
It is important to start with asking yourself what you want out of an investment platform. Is your priority to keep investment costs low? Or, are you willing to pay more to access a wider choice of investments? Usability will be important too. If you struggle to log into your account and then navigate the interface, then the platform may not be right for you. Service is also important to factor into your decision. Some providers do not offer telephone customer service, for instance, and rely instance on FAQ web pages and chatbots to try and resolve queries and issues. The latter approach may be cheaper for investors since the platform does not need to employ a big phone centre to speak with customers. However, you may find the service too impersonal and want the security of knowing you can speak to a human if there is a problem.
Common pitfalls to watch out for
An important area of investment platforms to watch out for is the fees – many of which can be “hidden”. Some providers will charge an “exit fee” or “inactivity fee”, for example, to encourage users to regularly buy and sell investments and keep their money on the platform. Whilst these may appear minimal at first, these could prove costly as your portfolio grows to a size where an appointed adviser could help with its ongoing management. Many will advertise themselves as “commission-free” trading platforms, which can give the impression that users can simply buy or sell investments without consequence. However, the cost may, instead, be hidden in the “spread” fee during a transaction – i.e. the difference between the buy and sell price of an investment.
Be mindful of the main currency of the platform, too. If the platform operates in US dollars, for instance, then your British pounds may be converted to the former as you transfer them to the platform. This may (or may not) offer you the best rate, and converting currency regularly will lead to eroded returns over time.
You should also consider the safety of your money. Although a platform cannot protect you from potential losses on your investments (e.g. a fund which collapses), it should offer you assurance if, say, the platform itself goes insolvent. UK-based fund managers should be FCA-authorised, guaranteeing up to £85,000 of a customer’s money if the former goes bust (the FSCS, Financial Services Compensation Scheme). However, note that many investments (e.g. exchange-traded funds, or ETFs) are based outside of the UK in places like Ireland and Luxembourg, where they are not covered by FSCS. This is one area where working with a financial planner can help. He or she can check whether an appropriate scheme is in place for the various investments you are interested in.
Conclusion & invitation
If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
