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This is an audio transcript of the Money Clinic podcast episode: ‘How do I choose a stocks and shares Isa?’

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Claer Barrett
So you’ve decided 2023 is the year you’re going to start investing into a stocks and shares Isa. That’s an account that will help you save tax as you invest. That’s what finance savvy Money Clinic listener who’s going by the name Henrietta has resolved to do until she got stuck.

Henrietta
When it actually came to crunch time, I became really, really overwhelmed and quickly became kind of quite tangled up in quite a lot of jargon.

Claer Barrett
Which is why Henrietta got in touch with us.

Henrietta
I thought, no, I can’t just be me struggling with this. I’m going to to reach out to Claer . . . 

Claer Barrett
Aww.

Henrietta
 . . . and actually to say (laughs) what on earth is going on?

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Claer Barrett
Welcome to Money Clinic, the weekly podcast from the Financial Times about personal finance and investing. I’m Claer Barrett, the FT’s consumer editor.

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Today’s episode is a one-stop guide to investing using stocks and shares Isas, a tax efficient and flexible solution for your long-term investments. But as ever, the topics we’re going to discuss in this episode are intended to deepen your understanding of Isas. Nothing I or the experts have to say is intended as an investment recommendation or individual financial advice. I cannot stress enough you need to do your own research. Before we hear from our experts today, let’s get some more detail from 30-year-old Henrietta. She’s originally from South Africa, but she now lives and works in the UK. And I was really glad to hear that before she even starts investing, she’s got a lot of the basics right.

Henrietta
Having done some research, I set up an emergency fund and, you know, set up my retirement and then saved up a tidy sum to sort of put to work.

Claer Barrett
Henrietta is already paying the max into her workplace pension, ensuring she gets the most free money from her employer’s matched contributions. And she’s confident that she can comfortably spare a few hundred pounds to invest in a stocks and shares Isa every month, and she’s prepared to lock up this money.

Henrietta
I’m aware that at 30 I have a bit of time. I can take a bit of risk, I can take a bit of the fluctuation that comes with investing in the stock market, and I’m aware that taking a higher risk also comes with getting a higher return.

Claer Barrett
So far, so good. But what’s holding Henrietta back is choosing the best place to open a stocks and shares Isa account — a bank, an online platform, a fund house or even a trading app. It’s a bit of a monkey puzzle, and the right option for you will depend on how much you have to invest, the kind of things that you might want to invest in and, most importantly, your goals. So what are Henrietta’s?

Henrietta
So putting stuff away for a home and possibly a holiday and possibly some renovations to that home when it comes to it. And, you know, also just being a little bit flexible with it because as you say, life happens. You know, I might need a car. I might need something expensive down the line.

Claer Barrett
Henrietta says she wants maximum flexibility with her investments but she’s also very conscious of investment fees.

Henrietta
I did quite a lot of kind of nitty-gritty research, and I’m finding a lot of Isa offers are saying shift across to us and get a cashback or this or that. But what I’m really interested in is the numbers, the fees, the fee structures, the platform, you know, how much it’s going to charge to hold the money on the platform, how much it’s going to charge annually, how much each of the funds are going to charge. It’s so complex that it’s easy to tempt with a £100 cashback if you do this. But at the end of the day you might end up losing all of that to just, to a fee structure. So I would say I’m a little bit suspicious.

Claer Barrett
Henrietta also knows that the fees on some funds are more expensive than others.

Henrietta
I think there’s quite a strong likelihood that the fees that come with actively managed funds are ultimately going to kind of eat into any of the amounts that you’ve made with an active fund, if that makes sense.

Claer Barrett
That’s why Henrietta is looking at cheaper passive funds, also known as index trackers. But that’s not the only reason she’s drawn to passive investing.

Henrietta
I can’t go around picking investments, you know, the next big thing, the thing that’s going to beat the market because firstly you don’t have the time and secondly don’t have the knowhow. So it would just be akin to a kind of gambling for me.

Claer Barrett
Another thing Henrietta is prepared to invest in is spending some time learning more about investing. So she also wants to pick a platform that could grow with her level of confidence over time.

Henrietta
That is the plan to start with a passive and then see how the confidence grows. Maybe with a bit of research and a bit more understanding, maybe a bit more kind of active management might come into that.

Claer Barrett
So let’s sum up what Henrietta would like to ask our podcast experts. [MUSIC PLAYING]

Henrietta
What is the best Isa for passive investing? How does one go about choosing an Isa that is best for one’s investment strategy in terms of fees? And how can I build a portfolio of different passive funds? [MUSIC PLAYING]

Claer Barrett
Lots of very sensible questions from Henrietta for our two investment experts who join me now in the FT studio, Moira O’Neill, the FT’s personal finance writer and columnist who’s better known online as @moiraonmoney. Welcome.

Moira O’Neill
It’s great to be back.

Claer Barrett
And Jason Butler, an FT columnist and podcast regular who’s better known online as @jbthewealthman.

Jason Butler
I always love being in this recording studio.

Claer Barrett
Well, we love having you both here. So let’s talk about your first impressions. You heard about what Henrietta had to say. Moira, do you think many people who are new to investing share the same kind of concerns?

Moira O’Neill
Definitely. She is not alone. It seems really confusing. There’s a myriad of choices. You can get yourself tied up in knots with trying to do all the research you possibly can before you actually start. And I think that’s why people end up delaying, particularly women. They want to feel confident. They want to have done the research before they put their money into anything. And you can end up delaying a year while you do that research. It’s probably better to go with your gut instincts and get started. She’s got some really healthy gut instincts there, Henrietta. She’s identified passive. She’s identified cutting her fees. She’s already contributing to her workplace pension. And she’s got some, a sensible amount to put aside every month. And I think she needs to bite the bullet and go for it and learn as she goes along.

Claer Barrett
And Jason, what did you think, listening to Henrietta?

Jason Butler
Well, I love the fact that she’s been so intentional. She’s being conscious about this. She’s being proactive. So absolutely, that is the most important thing, you know, that she’s really thinking this through. So that’s the first thing. The second thing is, I think, and you do tend to see this with women more than men, the sort of propensity to procrastinate, to want it all to be perfectly lined up because they’re worried about doing the wrong thing. So my advice is, look, you know, whatever you do at £200 a month is never going to kill you if you get it wrong, OK? So start and get better later. That’s the first thing.

Claer Barrett
Well, good to hear that your first impressions of Henrietta are favourable. But let’s start with the basics because while she’s done a lot of research, there might be listeners thinking, well, I haven’t got that far ahead. Back to basics with Isas. What advantages do stocks and shares Isas offer, and how can they fit with your broader financial plan, Moira?

Moira O’Neill
Well, I mean, stocks and shares Isas are the ultimate flexible investments, really. They’ve got tax advantages that help your money grow and you can also access the money at any time if you should want to. Now that’s not saying you should. If you’re going to start investing in a stocks and shares Isa, you should be prepared to lock it away for at least five years, I would say. But, you know, worst-case scenario, you really need a lump sum for something or other and you need to get your money out, you can. So unlike a pension where the money is really locked away until close to retirement age and, you know, you really can’t get your money out of a pension. So lots of people tend to use them together. They mix and match their pensions alongside Isas and give themselves, you know, loads of tax advantages alongside a bit of flexibility.

Claer Barrett
So Jason, back to basics with the tax advantages of Isas. Tell us why they are a good thing.

Jason Butler
Well, essentially, if you receive interest on bonds or dividends on equity funds, then you will pay no additional tax. And with savings and dividends allowances getting smaller and smaller over the coming years, that’s going to become more important, particularly as you build your wealth over the coming years.

Claer Barrett
Thanks for explaining those benefits, Jason. As with everything, you can’t have too much of a good thing. There are limits to how much you can pay in every year to your Isa.

Jason Butler
Well, there are limits to what you can put in, which is £20,000 a year.

Claer Barrett
That’s pretty generous.

Jason Butler
Across all the different types of Isas of which stocks and shares is the main one. But the beauty is that there is no current limit to what you can hold in an Isa. So if your investments are successful and you keep accruing them and keep adding to them, then that’s yours to keep.

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Claer Barrett
Where you choose to open your stocks and shares Isa depends on how much hand-holding you might need with your investment decisions. The quickest way to get started are the so-called robo advisers. They’re digitally driven solutions where you’ll answer a risk questionnaire and then be assigned a purpose-built portfolio that you can manage on an app. If you’re prepared to put in more of your own research, then there are online platforms where you can pick your own investments, including some operated by high street banks. Plus, some trading apps offer investors the ability to hold their money within an Isa structure.

Moira and Jason, how can new investors like Henrietta begin to narrow down these options?

Moira O’Neill
OK, so lots of investment platforms give choices for people like Henrietta. So they have starter fund recommendations, and you don’t have to be a customer of those platforms to read about the recommendations. So I suggest she goes and Googles, you know, starter funds, gets a few recommendations together and she already seems set on passive investing so there’ll be something on offer for her I’m sure. The other thing she could do if she really wanted to would be to go to like an online robo wealth manager which would help her put in her circumstances and give some recommendations for her. The fees can be a little bit more, but she might have some comfort there that she’s been given sort of a bit more of an extra guidance journey. But I think she seems perfectly capable of making those choices herself from what I’ve heard. And I would say, you know, go for it, there’s nothing wrong with choosing a global passive investment and just picking one to start with and then researching a few more and adding them in as she goes along.

Claer Barrett
I mean, Jason, what would, what would you add to that? I mean, your advice to Henrietta is obviously get started. Don’t waste any more time doing research. But clearly she knows she has to be diversified. We’ve had some guests on Money Clinic before who’ve put lots of money into a single stock like Tesla and have come a cropper. So her instincts are right, but what more would you add to other new investors?

Jason Butler
Yeah, I think keep it really simple to start with. OK. So if she’s got £200 a month, then my view would be — and this is not a recommendation, but this is the benchmark for which you should compare all solutions — so you look at Vanguard’s life strategy range, and they’ve got a range of funds that go from 20 per cent of equities all the way to 100 per cent of equities. They cost about 22 basis points, that’s just over a fifth of a per cent. So the point is not to say that you should use that and they’re the best, but they are your benchmark. That’s the no-brainer portfolio, which is global. And you can decide how much you allocate between bonds and equities. Now do remember that if they’ve got a shiny app and or if they do active management, it’s going to cost you more money for the convenience. The cheap, you know, Vanguard, for instance, charges you 0.15 for their platform to buy only their funds, which includes LifeStrategy. But many other providers that give you more choice — so that’s Hargreaves Lansdown, AJ Bell, Interactive Investor — they either charge a flat sort of platform fee of about £120 a year or they charge you up to .4-5 per cent per annum for the benefit of having a shiny sort of app and more choice. So if you’re comfortable, you’re starting point is OK, why would I not buy the, say, the LifeStrategy and there may be good reasons for that. You might want, for instance, ethical, ESG — environmental, social and governance fund — or it might be that what you’re looking for is a fund that’s, you know, got a lot more bonds in it, a lot less equities than perhaps you can get from other sources. So I think the point is costs are important, but remember, the more shiny the app and the more decisions they’re making about your investments, then the more it’s going to cost you.

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Claer Barrett
So with all of these choices to make about the type of Isa platform you’ll use, deciding what to actually invest your money in almost feels like an afterthought. But Henrietta is very drawn to the simplicity of passive funds, but also automating a regular investment every month. That’s something she’s prepared to commit to. Moira, what do you have to say about the potential pros and cons of a strategy like that?

Moira O’Neill
It’s a brilliant way to invest. Putting regular amounts aside every month means that you’re actually going to be buying more when stock markets fall and less when they rise. And that can work out really well to your advantage. So over time, you can actually do better than you would if you just put in a lump sum. And so I think, yeah, go for that. It’s also a great way psychologically of handling investing because it sort of, you’re sort of paying yourself first. You’re making sure it goes in regularly. You’re not worrying about whether it’s a good time to be investing this month or not. And you might read the news and get worried and think it’s not if you’re putting in lump sums. So I think it’s a great discipline. And she will just gradually see, hopefully, her funds build up over time and benefit from a bit of compounding, too, as they grow. So good for her. Go for it. Go for regular investing. Highly recommended.

Claer Barrett
Now, I have said somewhat controversially in an FT article before that there should be leaflets and boxes of Tampax extolling the virtues of regular monthly investment to women especially, who often think, well, save up or save up or save up. Now we’ve got enough money to become an investor. I’ll put in a lump sum, then the market falls and we often think cripes, but actually doing it every month for me as an investor I find is, like you say, more a massive psychological boost rather than putting in one big lump sum and worrying about it rising or falling.

But Jason, we’ve talked a lot about using passive funds. And I can certainly see the appeal to investors. But are there any downsides to using them?

Jason Butler
Well, you’re guaranteeing that you will never get more than the market return. So that’s the downside, as some people would see it. So the most important thing that’s going to affect most young people’s investment returns is, yes, even if you bought the most expensive rubbish active equity fund — let’s say you’re going to put your money equities compared to the lowest cost passive or even the best active with hindsight — the thing that’s going to make the biggest difference for the next 10 or 15 years to you is not those investment returns or even the charges. They will make a difference in the long run. But the biggest thing is what we call contribution effect. So when you are building your wealth, let’s say you’ve got nothing and you put £200 a month, the single biggest thing that’s going to increase the value of your portfolio next month is how much you have contributed and the next month and the next month. So focus on how much you can invest. So when you get to a party or you go on a date with someone, don’t ask how much they earn. Say, how much do you save and invest each month?

Claer Barrett
I wonder what my husband would have said if I asked him that on our first date (laughter). I don’t think he was saving anything at the time.

Jason Butler
My wife said to me, I made her laugh when I first met her and she said I had potential, but I certainly was not saving or investing any pennies (laughter).

Claer Barrett
How about you, Moira?

Moira O’Neill|
I would never have dared ask that to my husband when I first met him because he was unemployed (laughter). But no, yeah, it’s a great question to ask.

Claer Barrett
Very good. Well, podcast listeners, if any of you dare to ask that question on your next date, then let us know how it went. Now, when you buy a passive fund, you might be making one investment, but you will be gaining exposure to hundreds, perhaps thousands of different stocks in the index that that passive fund tracks. But nevertheless, Henrietta did have some questions, Jason, about how to make sure she is properly diversified using passive funds. Should she buy just one or should she try to build up a portfolio? And if so, how she should go about looking at that question?

Jason Butler
I think, while she’s starting out, as long as she uses a UK-authorised fund, which is what all the retail funds should be and doesn’t use anything like, you know, overseas funds from some offshore organisation. If she uses a UK-authorised fund and it’s a global equity index fund with or without global bonds, then she’ll be getting exposure to several thousand companies. That’s enough diversification. I don’t think you need to have lots of different, you know, £50 a month into this company, £50 into . . . because all you’re doing is duplicating the complexity and it’s more, it’s harder to follow that and you’re going to have to pay a bit more in platform fees to have that choice. So I would start off with one company you feel comfortable with that gives you global equity exposure with or without some bond exposure. And just start with that and get that to, have a milestone that where you want to get to that before you decide whether you want to use another fund group.

Claer Barrett
Now let’s talk about fees. I have to say, Moira, I was really impressed that Henrietta is already so focused on fees, although she is finding it hard to compare the charges that the different platforms and trading apps will have. Now, why do investors need to look so carefully at this, and what tips would you both offer for comparing the different options?

Moira O’Neill
Well, the importance of fees and that whole dilemma around it is that even very, very tiny differences in fees, I’m talking about half a per cent or 1 per cent a year . . . 

Claer Barrett
Which sounds tiny . . . 

Moira O’Neill
It sounds tiny. It can actually add up into thousands and thousands of pounds by the time you reach retirement. So it could mean the difference between a comfortable retirement or a not-so-comfortable retirement. There are websites that do help you compare platform fees. One is Boring Money. Another is the imaginatively titled, Compare Fund Platforms, and you can . . . 

Claer Barrett
Does what it says on the tin (laughter).

Moira O’Neill
And so you can put your specific circumstances into these tools. And so she’s putting £200 a month and she wants to invest in passives, for example, and they will give you an indication of which platform or wealth manager is right for you or is suitable for you. And I have to say, though, because she’s starting out with small amounts of money, she’s probably going to be better off using a platform that charges a percentage fee to start off with. But once she’s accumulated lots of money, loads of money, she’s reached one of those big milestones that Jason mentioned, she might consider moving to a flat fee structure because that can benefit you. I’m talking about when she’s reached about £30,000 plus, really, because, you know, if you’re charging, if you’re paying a flat fee every year, that can work out to your advantage once you reach that level. But yeah, yeah, it’s a minefield, but there are tools out there to help reduce your fees.

Claer Barrett
Oh, great tips there, Moira. And Jason, as somebody who’s worked in the past as a financial adviser, transferring stocks and shares Isas to, from one provider to another, like Moira’s saying, your circumstances change, another platform offers you a better deal, that’s all very well and good, but how easy is it to transfer Isas further down the line?

Jason Butler
Yeah, it’s pretty easy compared to the nineties when I was starting out in my career, it was a nightmare. It’s all bits of paper and nothing ever got, you know, constant phone calls. Now it’s pretty slick. A good site is Monevator. They’ve got great, great resource on all of the passive funds that you can use, including all the costs. And again with the sites that Moira just mentioned. Brilliant. Well worth looking at.

Claer Barrett
Oh, I didn’t know about Monevator. I would be having a look at that this weekend. Now finally, I was really encouraged that Henrietta wants to learn more about the wider world of investing. Now, she might not feel confident enough now to target themes using active funds, investment trusts or even buying individual shares. But she thinks that she might do in the future. Now, Jason, what tips would you offer anybody who is looking to learn more about investing and kind of back more of their instincts as they go to do it in a way that imperil their finances?

Jason Butler
Well, I don’t know if they ever watch them, but every week I send my daughters a Warren Buffett video. And this will typically be a show on YouTube of Warren Buffett dispensing some form of wisdom about investing and what the smart people do versus what the dumb people do. So Warren Buffett is a brilliant source. If you just bought all of his Berkshire Hathaway letters, there are books that show you all of the letters he writes to shareholders every year. If you just read those, one of those every week and you watched the Warren Buffett video as some description you would be doing, you would find it easier to get into the real simplicity of investing in capitalism, which is really human endeavour and the ability for us to trade and innovate.

Claer Barrett
What was the last Warren Buffett video that you sent to . . .?

Jason Butler
Oh, you can never get ahead using credit cards. There’s just no way you can get ahead ever in life by using credit cards and having 25-30 per cent interest. There’s just no way you can build wealth. Because he said if you’re investing and you’ve got debt, it’s like having your foot on the accelerator and the brake at the same time.

Claer Barrett
Wow. Well, that’s really good. Great recall as well (laughs). And Moira, what would your tips be for new investors who want to learn more about investing in a more active way once they get going?

Moira O’Neill
Well, I think there’s great stuff in the personal finance pages of the newspapers.

Claer Barrett
Is there anything in particular . . . 

Moira O’Neill
There’s a certain one; might want to read that. But, you know, I think all of the big investment platforms we’ve mentioned, Hargreaves Lansdown, AJ Bell, Interactive Investor, have educational materials there about investing. And you don’t have to be a customer of them. And I think, you know, just, just, you know, don’t feel you have to really immerse yourself in it. Just learn in a natural way because we’re all scarce of time. She’s already learned about passives. Even if she only ever learned about passives, she’s going to be fine (chuckles). I would say that to everybody. Passive investing. Fine. Global Equity Tracker. We could use that for the rest of your investing career over 40 years and be perfectly fine and have made a sensible decision.

Jason Butler
The key thing is to get into the right habit and always remember that investing is about reducing how much you’re going to have to save because the markets over time, very long periods of time, will compensate for the risks that are involved in investing.

Claer Barrett
Well, a wealth of investing points is there from our two experts, Moira O’Neill and Jason Butler. Thanks for joining us today.

Moira O’Neill
Thank you.

Jason Butler
You’re welcome.

Claer Barrett
Now, we’ve passed on all of their suggestions to Henrietta, who is so good at budgeting and saving that she’s currently on holiday. But if you were about to embark on your own investment journey, I do hope this episode has provided some inspiration.

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That’s it for Money Clinic this week with me, Claer Barrett, and we hope that you like what you’ve heard. If you did, spread the word and leave us a review. We’re always looking to chat with people about their money issues for the show. So if you’re interested in being part of a future episode and are looking for some expert guidance, then email us. Our address is money@ft.com. You could also take a peek at our website ft.com/money. Grab a copy of the FT Weekend newspaper. Me and Moira are in it most weeks, or follow us on Instagram. I’m @ClaerB. Moira is @moiraonmoney, and Jason Butler is @jbthewealthman. Money Clinic was produced in London by Persis Love. Our sound engineer is Breen Turner. And our editor is Manuela Saragosa. You heard original tunes this week by Metaphor Music. And finally our usual disclaimer, the Money Clinic podcast is a general discussion around financial topics and does not constitute an investment recommendation or individual financial advice. For that, you’ll need to find an independent financial adviser. That’s the small print for now. See you back here soon. Goodbye.

Copyright The Financial Times Limited 2023. All rights reserved.
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