Getting Started In Investing
March 3, 2010
5. Common Investing Vehicles
Most people use some sort of investment vehicle that invests on their behalf. Here we go through the basic characteristics of the most common ones.
Unit Trusts, OEICs, ETFs and Investment Trusts
These are all types of funds that predominantly invest in shares. Some of them may invest in a particular industry, country or region whilst others will invest in the whole market. They are also responsible for most of the colourful adverts in the weekend papers. These are the most flexible type of product, allowing you to get your money out at any time.
The charges for ETFs and investment trusts tend to be lower so, given the choice, we'd lean towards them rather than unit trusts or OEICs.
> Read more on unit trusts/OEICs, exchange traded funds and investment trusts.
Pension funds invest in shares, bonds, property and cash. You get tax relief on money you invest in a pension but there is a catch. In fact, there are three of them.
First, you generally can't touch your money until you are at least 55. Secondly, even though it's no longer compulsory, you'll probably have to use your money to buy an annuity, which means you give up your capital in return for regular income. Lastly, the rules regarding pensions keep on changing, making it more difficult to know where you stand.
A pension is usually seen as the standard way to save for your retirement but in reality it is just one of the options. Unfortunately, their obscure nature and inflexibility means that the charges on them tend to be quite high.
Strictly speaking an ISA is not actually an investment product, although it often gets confused with one. It is just a tax-free wrapper that sits around a fund like a unit or investment trust.
Like you, we quite like paying less tax. So there's a good chance that whatever we decide makes a good first investment, we'll want to protect it in an ISA.
> Read more on ISAs
With-profits and endowment policies
These products have been much criticised in recent years. And rightly so. They are highly inflexible beasts that require you to commit to investing a regular amount over a long time. That's no bad thing in itself, but if you do not manage to keep up the payments you end up paying heavy penalties.
These products are 'sold' rather than being bought. Like pensions their inflexibility and lack of clarity tends to result in high charges.
With-profit bonds attempt to smooth out the return of the stock market by awarding annual bonuses that cannot be taken away. But the largest bonus is kept right until the end and many people don't get that far.
As we saw earlier, over long time periods the stock market tends to rise so these 'guaranteed' annual bonuses offer little value. Therefore you pay a lot in charges for something that probably won't be necessary.
So where does that leave us?
What we want as a first investment is something simple and low cost. Therefore we're leaning towards a fund like a unit or investment trust, probably in an ISA. Onwards!