How does this financial journalist run his individual savings account (Isa)? It's more a 'seven grand question' than a $64,000 dollar question, as I only started my Isa relatively recently. As the proud head of a young family, I don't have piles of spare cash lying around, but I was keen to use my investment know-how and tax allowances to best effect. So, I opened a self-select equity Isa with an online broker in February 2007.
Given that a single year's Isa allowance isn't enough to get exposure to a broad range of individual shares, I believe (ETFs) are an excellent way to go here. They are absolutely perfect for someone like me who has only a modest amount to invest, as they can give you cheap and effective access to the entire stock and bond markets, as well as indices, commodities and even currencies.
Dealing charges for my self-select Isa are £12.50 a pop. Given this, I think the minimum worthwhile amount to invest in any given ETF play is £1,000. Assuming a high single-figure percentage return, costs don't then eat up too much of my profits.
Of course, I could buy conventional, actively managed unit or investment trusts to get broad market exposure. However, I'm not a huge fan of paying management fees for something I feel I can easily do myself, and which I actually enjoy doing. And the charges on ETFs are generally very low for mainstream indices, such as the FTSE 100.
As a mining correspondent, I obviously take a special interest in the prices of natural resources. I have strong views on where I think oil, gold, copper and zinc, for example, should go over the medium- to long-term. Commodity ETFs – or (ETCs), as they are known in London – are perfect for riding such trends.
How have I done, then? Well, rest assured that if I was outperforming, you would have heard about it in the first line. One big lesson that has been rammed home to me is that in a genuine, full-blooded bear market, most financial assets fall in unison. Commodities and shares have gone down together, hitting my holdings hard.
So, despite an early string of profitable ETF positions on such things as the MSCI Emerging Markets index, the Brazilian stock exchange, gold and silver, I have also made some costly mistakes. The bottom line is that the £7,000 I put in back in March 2007 is down by around 17 per cent.
My Isa is for the long term, though. One of the largest losses I am nursing is a long zinc position, via a commodity ETF. In the current worldwide industrial slump, zinc is likely to languish for some time yet. Now, if I owned shares in a zinc-producing company, I would be quite worried right now about whether my holding would still be worth anything at all by the time the price of the metal itself recovers. Companies can go bust or get taken over for a very low price by opportunistic predators. They can also raise vast amounts of equity in rights issues, massively diluting those shareholders who are unwilling or unable to stump up more of their cash.
Zinc itself, however, cannot go bust. True, there is some risk if the ETF provider itself were to get into trouble. But my feeling is that zinc's longer-term prospects are decent enough. I will, therefore, keep hold of my investments here and wait for time to do its work.
