How to manage your own ISA

Following the introduction of new rules that will require consumers to pay for advice, more and more investors will decide to ditch their independent financial adviser and go it alone. Indeed, research from business consultant Deloitte found that a third of consumers intend to become DIY investors, rather than paying for an expensive IFA.

But as Andrew Power, partner at Deloitte, explains: "There is a risk that consumers who do their own research may not buy the right products - making investments that are too risky, for example."

So if you plan to be a DIY investor, what factors do you need to consider when deciding where to invest your ISA allowance?

Most people have several ideas in mind when they think about their investment portfolio, says Adrian Lowcock, senior investment manager at Hargreaves Lansdown. These could range from a deposit on a house to a pension supplement or savings for children.

"In most cases, a savings pot for retirement is the long-term driver, but there may be one-off incidentals such as a home extension or new car. Those objectives define the timescale of your investment. But remember that for some expenses, you won't necessarily cash
everything in at the start – when you retire, for instance, you're likely to want to generate an income over maybe 20 years from that point," he adds.

The less time you have to invest, the less risk you can afford to take. Your nest egg could be seriously affected if the market crashes the month before you need to access your cash, whereas if you can take a 10-year outlook your investment should have time to bounce back and recoup your losses. As a rule of thumb, stick with cash if you're likely to need the money in the next five years.

Find the best Cash ISA or savings account for you

Attitude to risk

While you might start out with a gung-ho approach, as you draw closer to your retirement your focus will be protecting the capital you've got, not speculating to accumulate more.

But risk tolerance can also change in response to market movements. When markets plummet, investors often want to ditch higher-risk holdings. To be a successful investor, you need to eliminate these short-term panics by getting your risk profile right in the first place.

Dave Jeal, head of product management at Selftrade, suggests making use of the numerous risk-profiling tools available online at sites such as Selftrade or Interactive Investor (go to Fund investors can also try Fidelity FundsNetwork (go to MyPlan Portfolio Quickstart).

These tools give you an idea of your own risk profile and will suggest funds likely to suit you. Look out for broker community boards and forums, where you can pick up ideas from fellow investors.

When markets are falling, it's great if you are able to capitalise on events rather than panicking and selling out, adds Lowcock. "If your portfolio has dropped in value, think about your long-term objectives. The fall feels bad – but it probably doesn't matter, because you don't need the money at present."

He suggests asking yourself if your holdings are still sound and whether the fund manager is still up to the job. "These stocks and funds are now cheaper than they were – so this is both a terrible time to sell out and a good time to buy more."

Income or growth?

What you plump for will depend on your circumstances. If you're still earning, then you probably don't need income from your investments and are more interested in capital growth. But that doesn't necessarily mean you should ignore dividend-paying investments, particularly in the continuing slow-growth environment.

"Income funds tend to be less risky, because they invest in more established companies with the spare cash to pay dividends but less potential for major capital growth," explains Jeal.

"But dividends can be reinvested if you don't need the income – and it's a well-known fact that reinvested dividends are a key driver in long-term investment growth." For example, over 12 years to the end of 2011, the FTSE 100 lost 20%, but the FTSE 100 Total Return index, which includes all dividends reinvested, gained more than 20%.

Picking your portfolio

Focus first on getting the right mix of assets for your risk profile (with a higher proportion in less volatile fixed-interest investments if you're cautiously inclined).

Anna Sofat, managing director of Addidi Wealth, suggests that "cautious investors with a five to 10-year timeframe should look at about 70 to 80% in gilt/bond/absolute return and the outstanding balance in shares, while more adventurous investors should consider around half and half".

Many self-select ISA investors want to focus on individual stock selection rather than funds. But it can make sense to use funds to increase overall diversification, and to access overseas markets where you're likely to have much less knowledge of the companies listed or how strictly the authorities oversee their practices.

Active versus passive funds

There is also the question of passive index trackers versus actively managed funds. It's a contentious area – supporters of passive funds point out that they are cheaper, and that very few active managers are consistently able to outperform the market over the longer term. But Lowcock disagrees. "The best stockpicking managers are really adding value now. Look for those with strong performance over the past three years," he argues.

Either way, be sure to do your research, understand your company or fund - and, importantly, how it fits in with the rest of your portfolio. And then don't sit back - you need to keep a close eye on your investments.