Busting the common investment ISA myths
It’s 10 years since the mini and maxi ISAs were scrapped in favour of cash, and stocks & shares ISAs.
However, when most people talk about ISAs, they are almost always referring to cash ISAs. According to HM Revenue & Customs figures, approximately 77% of ISA subscribers in the 2016/17 tax year opted for cash ISAs.
But savers opting for an easy access cash ISA this season will be lucky to earn an interest rate of just over 1%. With inflation currently sitting at 3% and the situation unlikely to change in the near future, savers with money sitting in cash ISAs are losing out in real terms.
In which case, you may be better off considering a stocks & shares ISA. Here we bust some common ISA myths …
1) An ISA is just a savings account but with tax benefits, isn’t it?
No, there are two types of ISA – a cash ISA and a stocks & shares ISA. A cash ISA isn’t that different to a current account where you deposit cash. The main difference is you don’t pay tax on any interest made.
A stocks & shares ISA means you can save your money into a vehicle that invests in the stock market. If you invest your money in a stocks & shares ISA you have the real potential of outperforming inflation as well as benefiting from a tax break on your returns, but you will need to accept some variability in your returns and the potential for capital loss.
2) Investing in a stocks & shares ISA is limiting – I can only put money in stocks and shares
No, when you invest your money in a stocks & shares ISA, depending on the provider, you can choose to put your money into a wide variety of ‘assets’. These include funds, bonds and commodities as well as stocks and shares.
3) But saving in stocks & shares is just gambling… I’ll probably lose all of my money
Certainly, the stock market can sometimes fall and with it the value of any investments you may have. But, stock markets also rise. Crashes come and go reasonably quickly and, looking at the stock markets historically, they spend a great deal more time trending up than crashing. The key is to spread your investment over a number of different companies – for example, via a collective fund.
4) I can’t afford to invest lump sum of money into an ISA
Stocks & shares ISAs give you the flexibility to save a lump sum of cash or make regular monthly deposits. You can open a stocks & shares ISA with very little and then simply top it up as and when you can. Try setting up a direct debit for an amount you can afford to put away every month.
5) I’m nervous about risking cash on the stock market as it’ been so unpredictable
The great thing about a stocks & shares ISA is that you have the option of investing in markets all across the globe. I call this ‘owning the world’ and I encourage all investors to do this – do your research and make sure you opt for an ISA which invests in markets from across the world (the US, Asia, Europe, Middle East, Emerging Markets etc). This ensures your money is spread – otherwise known as diversification. If the markets are low in one part of the globe, chances are they’ll be riding high elsewhere.
Andy Craig is author of the best-selling investment book, ‘How to Own the World’