Five good Isa habits

In difficult, volatile and uncertain times, it’s important to remember that investing is a long-term game. If the future resembles anything like the past, staying invested will do a much better job of preserving and growing wealth than sitting on cash. Here are five important habits to hold on to.

Start early and keep paying in

The sooner you start investing, the longer you have to benefit from compounding returns. Time in the market is your most powerful tool, so put as much into your Isa as you can afford every year. 

Just look at Warren Bufffett to see how time is the investor's secret sauce. As Ben Carlson and Robin Powell point out in their book Invest Your Way to Financial Freedom, he bought his first stocks aged just 11. On his 60th birthday in 1990 his net worth was close to $4bn (£3.05bn), according to the Forbes 400 list. By the time he was 90 in 2020, his net worth was more than $70bn. Nearly 95 per cent of Buffett’s net worth was created after his 60th birthday.  

We might not all aspire to be Buffett. But if you invested £100 per month for 40 years and achieved an annual return of 5 per cent, you’d have over £150,000 today (from £48,000 paid in). However, if you invested £300 a month for 20 years achieving a 5 per cent annual return, you’d have around £123,000 today, having paid in a total of £72,000. Time is really important.

Check your asset allocation

Times of market turbulence can leave those who don’t have a well balanced portfolio exposed. However, don’t change your long-term plan based on short-term movements. 

“The idea is to stop your portfolio getting out of shape, and normally this happens gradually over a period of time, rather than in one fell swoop,” says Laith Khalaf, head of investment analysis at AJ Bell. “I’d suggest you review your investments once a year, maybe more, to check they’re still well balanced and, of course, to ensure your investments are performing as expected.”

Ben Yearsley, investment director at Shore Financial Planning, agrees it’s better to sit through market movements. “This doesn’t mean you shouldn’t react to a change in events, outlook, or circumstances, but generally what many do is chase performance by selling what’s fallen most and buying what hasn’t,” he says. 

If you pick stocks, check you haven’t become uncomfortably exposed to any one part of the market. This leaves you much more exposed to idiosyncratic risks. It could be worth holding a global equity index tracker as the core of your portfolio, for example, and then adding satellite holdings based on what you think will do well.

Keep costs down

If you are an active stock picker, try to keep your Isa with a platform that has low dealing fees as these can eat into your returns. Or simply try not to deal too often: the most successful fund managers tend to be ‘buy and hold investors’ and short-term market movements are notoriously unpredictable. If you invest in overseas securities, keep tabs on how much you are paying in foreign exchange fees. You have to pay these every time you deal because the Isa rules do not let you keep foreign currencies in your account.

Review your options

It’s worth re-evaluating your risk tolerance every year and making sure your Isa is invested appropriately in the context of your wider finances. If you foresee needing to use your Isa money within the next five to 10 years, it might be worth de-risking.  

If you think you might need to access your Isa money within the next 10 years, Henry Cobbe, head of research at Elston Consulting, says to consider using a target date fund, such as Vanguard Target Retirement 2030 (GB00BZ6VJD72), for a portion of your Isa. As you approach the target date the portfolio becomes less risky. 

Also think about tax efficiency. Do you have the potential to boost pension savings? Does your spouse have allowances that could be used? If you are in pension drawdown, could you take money out of your Isa to lower your overall tax burden?

Be patient

Volatility is an uncomfortable reality for all investors. But panic selling might be the worst thing you can do. History suggests some of the best days for performance come close to the bottom of bear markets. 

You also have to brace yourself for times of negative returns. But that doesn’t mean you should try to avoid them.  

“Very few people can time markets, and even fewer consistently,” says Rob Morgan, chief analyst at Charles Stanley. “Clearly, there are severe corrections in the market from time to time that result in the loss of capital, and it is best to try and time your new investments to coincide with dips in the market, but this is easier said than done."

Riding out the peaks and troughs tends to provide a better result.