Is it better to invest your ISA allowance early?
The debate over when it's best to invest your ISA allowance has run as long as the one over who is the best James Bond.
Should you invest at the last minute when all the investment companies are touting for your cash, or is it better to invest at the very start of the tax year to potentially benefit from a full year of growth?
Alternatively, could both of these strategies be trumped by investing on a monthly basis and thereby ironing out any fluctuations in the stockmarket?
We asked the experts for their opinions...
The early bird
According to this year's statistics from Fidelity International, ISA investors could generate £915.05 more growth over 15 years by investing before the end of April each year rather than waiting until the following March.
This example assumes the maximum PEP (predecessor to the ISA) or ISA allowance was invested in the FTSE All Share every year for 15 years. By the end of the period, the early-bird investor's total capital had grown from the £105,600 they invested over the term, to £126,421.23. During the same timeframe, the last-minute investor's fund had grown to £125,506.18.
You might say that £900 over 15 years doesn't present a particularly dramatic gain, but this could be more or less depending on the period studied. For example, the same study from Fidelity International last year showed an early bird investor's fund would have grown by an additional £7,000 when compared to the last minute investor's.
Darius McDermott, managing director at Chelsea Financial Services, says this is to do with the valuation of the market when you invest: "I agree in principle that being invested for longer does help compound returns. If markets always went up in a straight line then saving with a lump sum at the start of the year would be good, but of course they don't, so then it depends on timing."
He says if you invest your full allowance at the very start of the tax year, on 6 April for 2011, and then the market rises, it's good for growth, but equally if the market tanks you won't have gained much through being an early bird.
Looking at a more aggressive, actively-managed fund over the 15-year term seems to present a more compelling argument.
If an investor had put their full allowance into the Fidelity Special Situations Fund by the end of April each year for 15 years, they would now have an investment worth £244,252.08. If they had waited until the end of the tax year in March, their investment would only be worth £225,126.16, that's a difference of £19,125.92.
"If you are invested for growth it's all about timing and most timing is fairly accidental. What this example is telling you is to pay attention to what your money is invested in and if you are invested for growth the most important thing is to invest in the right assets."
McDermott agrees: "The vast majority of those 15 years, Fidelity Special Situations was managed by Anthony Bolton. During the noughties when the stockmarket lost an average of 22% Fidelity Special Situations was up at least 160% and for most of that time Anthony Bolton was at the helm."
As a rule, most IFAs advise investing a lump sum as and when you have it.
Francis Klonowski, partner at Klonowski & Co financial advisers, says: "The more time you spend trying to work out the best time to invest, the more chance there is of losing out. If you've got the money at the beginning of the tax year then stick it in then."
Traditionally, many people wait until the last minute to invest their ISA allowance, either because they are disorganised or because they are hoping providers will offer better deals during 'ISA season'. In terms of stocks and shares ISAs, providers may offer reduced transfer fees, lower management charges or lower minimum investment thresholds to entice investors at the end of the tax year.
But Klonowski doesn't adhere to the ISA season idea and thinks there's no reason to wait until the last minute unless you have to.
One way of getting around the timing issue is to invest regular monthly sums. This allows you to drip feed your lump sum and smooth out any volatility you might have experienced had you invested it all in the market at one time.
Not only is investing on a monthly basis a good way to instill a savings habit, it also means you will benefit from 'pound cost averaging'. When you invest a set sum on a regular business - in a unit or investment trust or example - you will buy fewer units when the market is up and more units when the market is down.
During a 12-month bull market you would get fewer units at a more expensive price if you invested monthly than you would if you invested a lump sum at the start of the year. In a falling market, however, monthly investing would buy you more units at a cheaper price than a lump sum at the start of the year.
So in uncertain markets, investors would be well placed to take advantage of pound cost averaging and over a number of years could expect to benefit from less volatility.
Merricks points out: "The key thing is to use your allowance and if that means the only way you can do it is by doing it monthly then fine. If you have enough money to invest a lump sum early you might as well."
One golden rule
All three IFAs came to one standout conclusion: it matters less when you invest your ISA allowance and more that you invest it in the first place (assuming you want to invest rather than save in cash).
So rather than scratch your brains trying to work out the best timing, simply do what you can afford, when you can afford it.
And if you're one of the vast majority of us that leave it to the last minute, make sure you start your application in plenty of time and don't miss out altogether. As contrary to the popular Bond film, you only live once.
This article was written for Interactive Investor
A catch-all phrase that can range from assessing the price of a property or vehicle before offering it for sale or the net worth of assets in an investment portfolio to the prices of shares on a stock exchange.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
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 financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
A bull market describes a market where the prevailing trend is upward moving or “bullish”. This is a prolonged period in which investment prices rise faster than their historical average. Bull markets are characterised by optimism, investor confidence and expectations that strong results will continue. Bull markets can happen as a result of an economic recovery, an economic boom, or investor irrationality. It is the opposite of a bear market.
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.