What should you put in your Isa?
With such a wide variety of investments on offer to fill up your Isa with, and the very real prospect of losing money, choosing which ones to include can be a daunting task. But it needn't be – as long as you stick to the following rules:
- Pick investments appropriate for your appetite for risk
- Always diversify the assets you choose – in other words, don't put all your eggs in one basket.
These two considerations should be at the centre of every investment decision you make and will help you to invest wisely.
What to invest in
The most sensible investors ensure they have a well-rounded portfolio so as not to be overly reliant on the fortunes of any one asset (type of investment). For example, they'll invest in a range of different shares (known as 'equities') in companies spread across different industry sectors. The idea is that if one share price falls, your other shares might rise in value and the two will cancel each other out – hopefully leaving you with a decent gain.
Those sensible investors also usually add to their equities by investing in other asset classes, such as bonds and/or property to try to spread risk. Here's a quick look what investing in these assets entails in more detail.
Bonds are loans to companies, local authorities or the government. You lend your money and are paid interest in return. They usually pay a fixed rate of interest each year (known as the 'coupon') and aim to pay back the capital at the end of a stated period (known as the 'maturity date'). This is why bonds are sometimes referred to as 'fixed interest'.
Corporate bonds are issued by companies such as Tesco and BT as a way of raising money to invest in their business. Governments can also issue bonds, known as gilts.
Once a bond has been issued, it can be traded on a stock exchange, where the price will rise or fall based on supply and demand; it can also be influenced by the wider interest-rate trend.
You will usually receive less interest from institutions that are more creditworthy and more interest from those that are less creditworthy, reflecting the higher risk that they might not pay you back. The amount of interest a bond or gilt pays is fixed, which means that if interest rates fall, they become more attractive; if interest rates rise, they become less attractive.
Investors can buy a property themselves and let it out – known as 'buy to let' – or they can invest in commercial property such as shops, offices and industrial warehouses. The latter type is usually accessed via a collective fund of some type rather than directly, and investors benefit from rental income and the price of the property itself should it rise in value.
Commercial property is very different from residential property (the house we buy, sell and live in) and does not always rise and fall in line with residential property market movements. The value of the property itself could fall in value, while buildings might remain empty, meaning there will be no commercial tenants to pay rent. Moreover, commercial property is not a 'liquid' investment, meaning it can be difficult to buy and sell quickly and easily.
However, many investors like to include some property in their portfolio because it helps them to diversify. For example, investors might still receive rental income even if equity dividends fall and vice versa.
How to invest
If you're investing for the first time, instead of buying individual assets – such as equities – directly, you could pool your money with that of other investors by investing in a 'collective fund'. These invest across a wide range of companies, sectors, countries and even other funds.
But Maike Currie, associate investment director at Fidelity Personal Investing, also warns against simply investing in funds that have done well in the previous year: "Many investors may intuitively look to buy last year's top performing fund. This can be a huge mistake.
"Last year's top performers will only tell you what fund you should have bought, 365 days ago. It won't help you decide what to buy now. Instead, look at factors such as the track record and experience of the manager at the helm of the fund and the fund's charges. Third-party ratings of the fund can also give you an idea of what the professionals think."
Moneywise asked three leading investment professionals for their fund tips for investors based on three risk appetites: low, medium and high risk. Here are their picks.
Patrick Connolly, a certified financial planner at Chase de Vere, recommends: Newton Real Return. "This is a multi-asset fund designed to preserve capital and beat inflation. The managers adopt a team approach to running the fund and have a great deal of flexibility over where they can invest, all the time mindful of managing downside risks. The approach is proving to be very successful as the fund has produced a positive return in every year since it was launched in 1998."
Darius McDermott, managing director of Chelsea Financial Services, recommends: Elite Rated M&G Corporate Bond. "This fund is significantly less risky than the UK stockmarket, which is consistent with the nature of the underlying investments. It has a focus on investment-grade bonds and is constrained by its benchmark, which places it at the lower end of the risk spectrum within its sector."
Connolly recommends: JPM Multi Asset Income. "This fund looks to achieve the best risk adjusted income, which can be taken either monthly or quarterly, by investing in a wide range of underlying assets – including equities, fixed interest and REITs (Real Estate Investment Trusts which invest in property)."
McDermott recommends: Elite Rated Threadneedle European Select. "The fund is concentrated and has a large-cap bias, almost 50%. The fund has had the second lowest volatility in its sector over the past five years. The high-quality companies the fund invests in tend to be more defensive and resilient than the average stock in the index."
McDermott recommends: Elite Rated BlackRock Gold & General."Gold is experiencing something of a revival from a four-year low late last year – and has the potential to move higher. This highly specialist fund invests not only in physical gold but also gold mining equities and other precious metal shares.
BlackRock has a pedigree running this type of mandate, with the experienced manager, Evy Hambro, supported by a team of gold experts. But the fund has double the risk of an investment in UK shares."
Danny Cox, a chartered financial planner at Hargreaves Lansdown, recommends: Legal & General International Index Trust. "For those investors looking for a simple and low-cost exposure to global stockmarkets, this fund tracks the performance of the FTSE World (ex UK) Index. It is one of the simplest ways to access global markets, covering over 2,200 companies listed around the world, excluding the UK."
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.
Available from 1 November 2011, the Junior ISA will replace child trust funds (CFTs), which have been phased out. Junior ISAs will have a £3,000 limit and will be offered by high street banks, building societies and other providers that currently offer ISAs to adults. You can invest in either stocks and shares or cash. But, unlike CTFs, there will be no government contributions into each child’s savings pot. Money invested in Junior ISAs will be “locked in” until the child is 18, and the ISA will default to an adult one.
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).
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
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.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.