Experienced Investor
Ideas for the Isa season: Five secrets to Isa success
Guest Author:
Maike Currie, associate investment director at Fidelity Personal InvestingInvestment doesn’t have to be rocket science, and one of the best starting points to becoming an investor is by opening an individual savings account (Isa).
Think of an Isa as the ‘packaging’ within which you can hold a host of different investments – from cash deposits to shares, bonds and funds. Each year you can shelter a fixed amount within an Isa – known as the annual limit or allowance.
Remember that if you miss out on using your Isa allowance this year, there is no opportunity to carry it forward. It is a ‘use it or lose it’ benefit. Hence even if you can’t afford to shelter the full amount (£15,000 for the 2014/2015 tax year) it will still pay to put something away.
Here are five simple Isa guidelines that could help you make a significant long term difference to your financial well-being:
1. Stocks and shares = superior returns
A stocks and shares Isa is based on stock market investments and allows you to invest in a range of investment vehicles such as bonds, equities and funds. This is a more risky option than a cash Isa as your money will be exposed to the vagaries of the stock market. However, the true value of a stocks and shares Isa will manifest itself over the long term. Over most time periods, the returns from shares have beaten those of other asset classes such as bonds and cash.
Fidelity Personal Investing calculates that if a saver had invested £15,000 into the FTSE All Share index over the 10 year period from 31 January 2005 to 30 January 2015, they would now be left with £31,542.83. If, however, they had invested £15,000 into the average UK savings account* over the same period, they would be left with £16,346.70. That’s a significant difference of £15,196.13 – too large for anyone to ignore.
2. Diversify and monitor
One of the golden rules of investing is not to put all of your eggs in one basket. By investing across a range of geographies and the traditional asset classes of equities, bonds and cash, you can reduce risk and adjust the overall level of income your investments are earning. Once your Isa is set up you can’t just ignore it. You need to monitor it. Market movements could mean that your Isa portfolio no longer matches your risk appetite, time horizon and objectives. Revisit your Isa from time to time, perhaps every three to six months to ensure your asset allocation is still in line with your investment objectives, and that you are still well diversified.
3. Reinvest income if you can
Reinvesting the income you receive from your investments increases the amount of money working for you over the longer term. This is called compounding, as income is converted effectively to capital which, in turn, earns more income and so on.
If you’re investing in equity funds, reinvested dividends will make all the difference to your capital pot over time. The Barclays Equity Gilt Study in 2015 showed that the value of £100 invested in UK equities at the end of 1945 would be worth £9,148 in nominal terms (without taking account of inflation) if dividends were paid out – but would have reached £179,695 if they were reinvested.
Ploughing back your income, whether by compounding interest or by reinvesting dividends, is a powerful investment strategy and can have a significant impact on your income over the long term.
4. ISA ‘shop’ at a supermarket
Charges can eat into the investment returns and reduce overall income. One way of cutting costs is by buying the funds you want to hold in your Isa via a fund supermarket. This can make a significant difference to your investment portfolio’s returns over time.
With a fund supermarket you just get one regular statement, making the administration of your investments much easier. You can buy and hold your investments all in one place, and switch investments without having to pay high charges.
Some fund supermarkets also boast comprehensive research teams which can provide valuable insight and guidance on funds from across the market place.
5. Invest regularly
Unless you have a large sum to invest, a good way to build up significant savings over the years is to start a monthly savings plan.
Investing regularly is a good way to smooth out the ups and downs of the stock market. This has the added benefit of being more affordable – not everyone will have the full Isa allowance lying around at the beginning of the tax year.
It also helps you take the emotion out of investing. Making it into a mechanical monthly process provides the discipline to keep saving through the ups and downs of the market. That could improve your returns by making sure you invest when sentiment is poor and prices more attractive.
* Morningstar’s UK Savings 2500 (G) MP002 tracks average UK cash savings accounts.