In these uncertain economic times and nervous markets, many Isa investors may feel very reluctant to subject their hard-earned cash to the uncertainties of stock market investment at all. But there are various simple precautions you can take, both to help minimise the risks involved and to maximise your tax-free returns going forward.
1 Nothing ventured, nothing gained. You have the opportunity to shelter investments worth up to £7,200 from the taxman this tax year, but if you don't take action before 5th April (which this year is a Sunday], this year's allowance disappears into the ether forever and yoError! Hyperlink reference not valid.ur money remains taxable. Back-dating is not allowed.
2 Consider drip-feeding your allowance into the market on a monthly basis. Fund supermarkets and some brokers, including Selftrade, offer a regular investment facility into a range of funds, shares, investment trusts and exchange traded funds.
As well as broadening the investment options if you don't have a single lump sum available, regular investment helps to smooth the ups and downs of the market. Because your fixed cash contribution buys more units when markets are depressed, and progressively fewer as shares get more expensive, the average price of your units is kept down – a process known as 'pound cost averaging'. It also does away with the risk that you could invest all your money just before share prices take a tumble.
3 Phasing options. Monthly savings plans may suit many investors as a long-term strategy, but they won't work if you have only a matter of weeks left until the end of the tax year.
When you have your lump sum available but don't want to plough it all into the market at once, consider the 'phasing option' offered by some brokers, whereby you make your investment into the Isa wrapper, but hold it as cash to begin with. You can then allocate it to your chosen funds or shares in chunks over the coming months.
Dr Stephen Barber, head of research at Selftrade, said: 'It is a common misconception that ISA funds need to be invested upon subscription. The attraction of a self-directed stocks and shares account is that not only is the investment choice in the hands of the ISA holder but so is investment timing.'
4 Move cash Isas into stocks and shares Isas. Since April 2008, it has been possible to transfer cash Isas from both current and previous tax years into an equity Isa. With interest rates on all variable and almost all fixed rate cash Isas well below 4 per cent - and likely to fall further, given widespread expectations that the bank base rate could fall to zero – there's an argument for siphoning any money not needed as an emergency cash cushion over to the bond or equity markets over the coming months. But be warned: you cannot move it back again into the relative safety of a cash Isa.
5 Consider costs. The more money deducted in dealing and administration charges by your Isa provider, the less you will have in investments, so when you set up an Isa do look carefully at the charges involved. For managed fund Isas, the costs of the wrapper are subsumed in the fund charges themselves, but you should still look for a discounted initial charge.
If you want a self-select Isa, compare online brokers to find the cheapest share dealing fees, best frequent trader discounts, and any additional charges that could bump up total dealing costs. Look also at the Isa administration fee, which may be a flat rate or a percentage of the share portfolio. Fixed fees have the significant advantage of simplicity and transparency. Selftrade, for instance, charges a flat account fee of £25 and a flat dealing fee of £12.50. There are no dealing charges for unit trust and OEIC purchases.
6 Balance your portfolio. Diversification has provided less protection than many experts would have hoped or expected over the last difficult couple of years; but in the normal course of events it makes a lot of sense to hold a mix of assets with low correlation to each other in your portfolio. That might typically involve a mix of large and smaller cap equities, corporate bonds, property and commodities, accessed directly (where Isa rules allow) or through collective investments.
7 Diversify geographically. Similarly, different regions offer different levels of risk, return and, importantly, recovery from the present downturn. For example, many experts expect the US to lead the way out of recession, as it was first in there. There is also support for Asia Pacific as a region likely to escape relatively lightly from the global banking crisis. You may be able to find model asset allocation portfolios online, or talk to an investment expert for more bespoke guidance.
8 Multi-asset funds. Alternatively, these funds attempt to do the job for you, by investing in a broad cross section of assets, often including alternatives such as hedge funds. They're a new breed, and have had something of a baptism of fire, but many advisers rate them highly for ready-made diversification.
9 Exchange traded funds. Don't trust your own or the managers' stockpicking abilities? ETFs are listed on the stock exchange and trade as ordinary shares, but invest in a whole index, region or industrial sector, as well as physical commodities such as gold or oil. They're accessible, transparent, and also cheap: a fine way of 'buying the market', or indeed a widely diversified collection of markets. Stephen Barber points to the benefits of these instruments saying 'they offer the ability to build a diversified portfolio reflecting investors' long-term objectives'.
10 Don't leave it too late. If you need to set up a new self-select Isa, don't wait too long. Not only can providers get busy, but you may find the closing date for new applications is days or weeks before 5 April. Selftrade, for example, accepts new Isa applications up to the last week before the deadline.
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