Expert investment tips for your Isa - the cautious investor
With interest rates now at their historic low of 0.5% for six years and counting, thousands of savers have piled into the stockmarket in a bid to get a better long-term return from their cash.
And during Isa season - when many beginner investors enter the market - it's more important than ever to ensure you invest in the right mix of assets and vehicles in order to generate the best return possible. Especially if you've left it to the last minute.
Today there are more Britons than ever putting their faith in equities. Figures from trade body the Investment Association highlight that, last year, the amount of cash in funds which themselves invest in the likes of shares and bonds, soared to a new high of £834 billion.
The dash to the market should not come as a surprise. Ever since the Bank of England slashed interest rates to their 300-year low to help boost the economy in the midst of the financial crisis, inflation - the rising costs of goods and services - has turned into the silent assassin of savings, as banks and building societies axed interest rates on deposit accounts to the bare minimum.
Figures from asset management group BlackRock, show that £1,000 saved six years ago would today have the spending power of just £832.
But, and here's the rub, had the same £1,000 been invested in the UK's stockmarket back in March 2009, it would have since more than doubled to some £2,200 today.
And while the fall in the price of oil may well have sent inflation, as measured by the Consumer Prices Index, to a record low of 0.3% in January, it is not expected to hang around in the doldrums for too long, given the Bank of England has a target of 2% to hit.
But for last-minute Isa savers thinking of hitting the market, there are a number of factors to bear in mind when considering long-term investments.
While getting rich slowly is not an aphorism often rolled out, it makes sense when it comes to stocks and shares. Sensible investing is about patience and sticking with it for the long term – there will be bumps along the way but pressing the eject button when the going gets tough is more often than not the wrong move.
For example, according to Fidelity Personal Investing, if you had invested a one-off £1,000 in the UK 20 years ago but missed the best 10 days in the market since then, you would have ended up with a total of some £2,569. But had you stayed invested and not missed a single day that £1,000 would now be worth £4,747 – a significant difference of £2,178.
Fidelity's investment director Tom Stevenson explains: "It's difficult to predict the best time to be in and out of the market, especially as the best and worst days very often tend to bunch together during periods of heightened volatility. There is a real danger that you increase your underperformance by capturing the worst days in your personal performance while missing out on the best. Time in the market matters more than timing the market."
The key is to stick with it, for five years at the very least, and drip-feed in your cash on a monthly basis and use your Isa allowance, where you can stash away up to £15,000 a year and all gains are free from the clutches of the taxman. In fact by maximising your full Isa allowance every year, Stevenson calculates that you could become an Isa millionaire in just under 28 years, assuming modest annual average growth of 5% per annum.
The vast majority who dive into the stockmarket are doing so for a medium- to long-term objective such as a buying a house or saving for retirement, perhaps via a self-invested personal pension or Sipp so once you have chosen the best investment strategy for reaching your goals, stick to it. Ultimately the longer you stay invested, the greater the probability that your investment will generate a positive return. We look at what funds the experts are tipping for the cautious investor.
The cautious investor
For cautious investors who are at the lower end of the time-horizon spectrum but are looking to put their cash away for at least five years, they may be wise opting for a so-called multi-asset fund. These portfolios, as their title alludes to, invest across a broad range of assets – and not just shares.
Among other assets, they also invest in bonds – IOUs, issued by companies that pay interest to investors for a set period of time before returning the cash – as well as in commercial property funds, which invest in offices and retail parks, where the rents paid can provide a stable income.
Darius McDermott, managing director of Chelsea Financial Services, tips the Rathbone Multi-Asset Strategic Growth fund. The portfolio has around 57% invested in shares with the remainder spread across other assets and over the past five years has achieved a total return of 36% for its investors.
McDermott says: "As its name suggests, the fund has a growth angle but it is very cautiously managed while still providing investors with nice diversified spread of assets."
AXA Wealth's head of investing Adrian Lowcock backs Newton Real Return for investors of a more nervous or short-term disposition. Another multi-asset vehicle, it focuses on preserving capital in order to grow and has investments spread across the globe. Over the past five years, it has produced a return of 24%.
Lowcock explains: "The fund's flexibility, coupled with its pragmatic manager, makes this an attractive investment for investors looking to protect capital."
Jason Hollands, managing director at Bestinvest, recommends potential investors who are not prepared for a rollercoaster ride across markets check out another multi-asset vehicle, the Invesco Perpetual Global Targeted Returns fund.
Hollands says: "It has a worldwide remit and aims to provide for growth for cautious investors by delivering a positive return in all market conditions over a rolling three-year period." Launched in September 2013, the fund has since delivered a return of 14%.
Which sector will be the most popular for Isa investors?
The funds currently playing a core role in many Britons' Isa portfolio are UK Equity Income vehicles. These funds invest in UK-listed dividend paying corporations, which not only have strong cashflows but can grow their businesses, profits and indeed dividends over time. They are widely believed to be one of the best long-term investments around - and over the past five years, the average fund has achieved a substantial return of more than 70%.
Today, Britons have a massive £58.9 billion invested in these portfolios - which is perhaps unsurprising as dividends are big business. This year, for example, UK firms will share out more than £86.1 billion with their investors, according to research hub Capita Asset Services. For long-term investors who do not need the income now, reinvesting dividends has the potential to have a huge impact on long-term total returns.
For example, according to Barclays Equity Gilt Study 2014, £100 invested in UK equities in 1899 would be worth £14,915 today. But that is if dividends had not been reinvested - if they had, the return rockets to a massive £2.2 million.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Like a self-select ISA but for pensions, self-invested personal pension is a registered pension plan that gives you a flexible and tax-efficient method of preparing for your retirement. It gives you all sorts of options on how you put money in, how you invest it and how it’s paid out and offers a greater number of investment opportunities than if the fund was managed by a pension company. SIPPs are very flexible and allow investments such as quoted and unquoted shares, investment funds, cash deposits, commercial property and intangible property (i.e. copyrights, royalties, patents or carbon offsets). Not permitted are loans to members or people or companies connected to the SIPP holder, tangible moveable property (with the exception of tradable gold) and residential property.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).