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Last minute Isa investing tips

Your annual individual savings allowance expires on Saturday 5 April. But if you feel the urge to panic buy, here are some tips to calm your thinking.
April 2, 2014

Investors rushing to invest their individual savings account (Isa) allowance before midnight on Saturday 5 April have more options than the obvious one of pushing the whole lump sum into one investment. But don't leave it too late - an online Isa transaction has to be completed before midnight and normally takes between five and 10 minutes.

Here are some ways to think about your last minute investment options.

If it’s your first Isa:

Don’t try to be too clever and go for a high-risk option such as a mining or oil stock. We see lots of examples in the IC’s Portfolio Clinic of investors aged under 30 using just this sort of high risk strategy. Instead, think about your Isa portfolio as a set of building blocks, with the firmest foundations at the start.

The first thing to do is to establish a low-cost highly diversified holding to be your foundation. Establishing a core is suitable for beginner Isa investors, but even seasoned Isa investors who forgot to do this at the outset and invested in high-risk holdings should take time to go back to basics. Never put off correcting your investment mistakes. Most of us will have long investing careers. Even once you’ve retired you may have 20-30 years as an investor so it’s never too late to improve your portfolio. Your core holding could be a broad-based exchange traded fund (ETF) such as iShares MSCI World - B UCITS ETF (CSWD) that gives you exposure to equities in developed countries worldwide. Alternatively, you could pick a global growth investment trust such as Witan (WTAN), which is still trading at a 3 per cent discount to its underlying net asset value.

There’s also nothing wrong with simply sticking with the UK market. The FTSE 100 contains the largest, most frequently traded shares on the London Stock Exchange and includes many of the UK’s best known household names such as Vodafone, HSBC and GlaxoSmithKline. The UK’s largest listed companies are an excellent source of income. But if you don’t need the income, then pick the share class of the fund or exchange traded fund that automatically reinvests the dividends. We like iShares FTSE 100 UCITS ETF Acc (CUKX) which has a TER of 0.15 per cent and reinvests the dividend for you.

 

If you’ve been investing for a few years:

Diversify. A classic portfolio should spread exposure around various geographic markets and assets, helping balance out the peaks and troughs. After all, investment should be considered a marathon, not a sprint and with talk of a market correction still rife, this takes on added significance.

Don’t ignore the US, a classic mistake that we see investors making. US equities make up more than half of the MSCI World index. A S&P 500 ETF would be a good place to start investing in the US, with the added benefit of many analysts (including the IC’s Dominic Picarda) saying it would be good timing to buy into the S&P now. SPDR S&P 500 ETF (SPX5) aims to track the performance of the S&P 500 index as closely as possible has a TER of 0.15 per cent.

Aside from the actual investments, take time to think about the timing of your investment.

 

Lump sums don’t have to be invested straight away:

You need to put your money into an Isa wrapper before 6 April 2014 or lose the tax-free investment allowance forever. But if you use a self-select Isa provider or platform that will allow you to choose from a range of investments, you don’t actually have to make your investment decision by Saturday. Instead you can keep the money in cash and phase your investments into the markets. There are several ways you could do this.

 

Phasing in:

Here you take out your whole Isa allowance but think about it as a three-part investment: You could invest a third now, and phase in the other two chunks over time. This strategy allows you to wait to see if there is a May or June sell off in the equity markets.

 

Drip feeding into market:

Instead of making a mad dash at the end of the tax year, many savers choose to contribute to their Isas through a monthly savings plan, putting a little away every month. This takes away the stress of leaving your decisions to the last minute, as well as keeping your investments free from the impacts of bad market timing.

If you want to drip feed your allowance each month, while establishing a core passive holding, you may need to choose an index fund, rather than an ETF. Every time you buy an ETF, you pay stamp duty and trading fees so they don’t suit small regular sums.

 

Don’t leave it to the last minute for next year:

Investors who started investing when Isas were launched and put their Isa money to work on the first day of the new tax year, rather than the last, would be better off by £6,519.

The analysis by Hargreaves Lansdown shows that if an investor had put their full Isa allowance into the FTSE All-Share each year since 6 April 1999 they would now have £172,955 compared with £166,796 for a last minute Isa investor.

In tax year 2010/11, the early bird Isa could have made investors an extra £3,529 instead of leaving until the end of the tax year.

But don’t worry too much about the impact of the different timing approaches on your investment. The important thing is to use your allowance.

Over the longer term, there is a relatively small difference in investor return between lump sum investment and regular monthly saving, even with the more volatile emerging markets where you might expect regular savings to have the edge.

Last minute vs early-bird Isa

When full Isa allowance investedValue
Beginning of the tax year (6 April)£172,956
End of the tax year (5 April)£166,796

Source: Hargreaves Lansdown. Shows outcome of investing Isa allowance into the FTSE All-Share each year since 1999. Lump sum was invested in on the first investable day of the new tax year so 6 April if it landed on a week day or 7 or 8 if not. End of tax year was based on 5 April or earlier if 5 April was on Saturday or Sunday. It also assumes the full allowance is used at the end of this year.

Early-bird lump sum v regular saving Isa

Frequency of investmentIndexValue
Lump sum (start of the tax year)FTSE All-Share£172,956
Regular savingFTSE All-Share£171,388
Lump sum (start of the tax year)MSCI Emerging Markets£259,230
Regular savingMSCI Emerging Markets£252,184

Source: Hargreaves Lansdown. Table compares investing full Isa allowance every year on the 6th April from 1999 as a lump sum, compared with regular monthly saving.