Amid the market mayhem caused by the coronavirus, it has been easy to forget that a new tax year has just begun and that means your £20,000 annual Individual Savings Account (Isa) allowance has reset.
During the most painful sell-off in over a decade, the temptation might be to steer clear of the stock markets. But the current turbulence shouldn’t put you off making the most of the tax breaks that come from using up your Isa allowance. Remember use it or you lose it.
Here are 5 tips for making the most of your Isa during the coronavirus sell-off:
1. Don’t forget the difference between contributing and investing
You can contribute to your Isa without actually investing in the stock market. Move your money into your stocks and shares Isa account to make the most of your annual allowance, but leave it as cash until you’re ready to invest it.
Stocks and shares Isas certainly aren’t the best place to hold your cash for a long period of time, but moving your money prior to the deadline will allow you to benefit from the tax breaks on offer.
Tips for making the most of your Isa
Individual savings accounts (Isa) are a great way for savers and investors to build up the sums they need to meet financial goals such as a decent sized retirement pot or a deposit for a home. But if you don't know how Isas work and how to use them to manage your wealth, you won't be able to take full advantage of their benefits. This article runs through 10 need-to-knows to get the most out of your Isa.
2. Don’t let fear of volatility put you off investing for the long term
The markets are currently enduring painful sell-offs, confusing bounces and frightening volatility. We wouldn’t blame investors for wanting to take stock of the situation before leaping in.
But it is important to remember that investing is for the long term and big gains can be made during the markets’ most painful periods.
How to understand market behaviour
This overview of the UK stock market should help reassure you that sell-offs are a normal part of market behaviour. Although painful, they will bounce back eventually.
3. Drip feed your cash savings into equities
Lockdown is causing significant pain for a number of major industries. New research suggests that a fifth of small businesses in the UK could run out of cash before the end of April, putting many thousands of staff out of work. The knock-on effect on the banking, property and commodities industries is also likely to be significant. The downturn in the UK stock market is therefore likely to be far from over.
Buying equities as they are plummeting might seem foolish, but fear of a falling market can prevent investors from enjoying the biggest rises when those markets return to health. It is impossible to tell when the markets will hit their bottom, so drip feeding your cash into stocks and shares is the best course of action.
How to drip-feed money into distressed markets
Putting more into the stock market while the country is on the brink of national health crisis and the economy is on lockdown may, understandably, feel like the last thing you want to do. But by investing regularly, such as once a month, in volatile markets you should benefit when the markets recover. This article explains why and shows you how.
4. Diversification is vital
A well-diversified portfolio is always important. But now, more than ever, it is crucial that investors put their money in wide selection of companies, industries and geographies.
Global ETFs and Investment Trusts can help with diversification, while stock pickers should look in a variety of industries for undeniably high quality – companies with strong balance sheets and a high return on capital employed are best placed to bounce back from the turbulence. The outlook for certain sectors should also be considered as the coronavirus fallout escalates: retail, travel and hospitality could be under pressure for a long time. The outlook for certain industries is also having an impact on shareholder returns. As dividends are slashed in some of the big income-paying sectors in the UK (including the banks), international income funds might prove a better option for those seeking regular cash returns.
Some downside protection in the form of defensive investments might help soften the blow as the markets continue to fall. This could include funds which track the price of gold or fixed income ETFs. But beware, these lower risk assets have enjoyed big price rises amid the volatility of the last few weeks and are therefore looking significantly more expensive than equities.
Investment trusts to weather the dividend drought
The tendency of investment trust shares to sell off heavily at times of market volatility means that some equity income trusts can be picked up cheaply. But it is very important to exercise care, this article can help you responsibly manage your investments in tough times.
5. Don’t panic
Over-trading is expensive at the best of times and it can be especially costly if you are buying and selling regularly when markets are falling. Remember that investing is for the long term. If you are going to need the money within the next five years, committing it to stock positions might not be the most savvy option because of likely volatility, but for long-term savers, equities should provide excellent returns. Just maybe refrain from checking your portfolio too regularly during the turbulence.