ISA investing for 2019/20 – a little or a lot but often

It can be a relief to get past 5 April: no more ISA investing articles in the press banging on about using your ISA allowance BEFORE IT’S TOO LATE! There is a sense of peace and calm and resting on laurels of having used your allowance or being sanguine about not having done so.

And then some fool starts on about using your allowance for the next tax year. And if you think you’ve a year to sort that out, they go on about seizing the momentum not to mention the years’ worth of investment returns and dividends which would otherwise be lost.

So why should you dive straight in – should you invest the full ISA allowance in one go? Should you drip feed your allowance in over the year? Or let your provider do it for you?

For many investors, at this point in time especially it is not so much lack of momentum or organisation but apprehension over market uncertainty. Is this the time to be investing at all? And if so – where?

The Investment Association recorded huge outflows this February at a time when one would expect people would be investing coming up to the end of the ISA season.

Net outflows from retail investors totalled £156 million. That time last year £1bn had gone in.

“Despite a slight improvement in investor confidence, February experienced the fifth consecutive month of net retail outflows,” said Chris Cummings, chief executive of the Investment Association. “Savers turned towards Mixed Asset and Global equity funds to weather the ongoing economic and political uncertainty, giving European and UK equity funds, which saw continued outflows, the cold shoulder.”

UK and European equity funds respectively saw net outflows of £236 million and £456 million in February, while £513m was invested in global funds and £206m in mixed asset funds.

To invest or not to invest

There is indeed an air of uncertainty at present agrees Andy Parsons, head of investments at The Share Centre but he warns that investors should not this let this cloud their judgement but is an advocate of investing in any way is better than not being invested at all.

“For many, there is a misconception money placed in their ISA must be immediately invested – however this is wrong. Money can be added to an ISA and simply left there, remaining un-invested until such time as you feel confident enough to take the plunge back into the market. Remember what can’t be replaced is the ISA allowance you may be giving up through reluctance and concern about not wanting to invest.”

There is also a lot to be said for running counter to the herd – a time at which nervous investors are bailing out could just be the time to do the opposite.

“While it is understandable that some investors are unnerved by current political uncertainties, I would urge them not to let the white noise of current events drive long-term investment decisions,” says Jason Hollands, managing director, business development and communications at Tilney Investment Management Services. “In fact, when anxieties are high and this weighs on valuations, that is typically a much better time to invest – when considered in retrospect – than those times when optimism is in abundance, confidence is high, but valuations are often rich.”

It is well acknowledged that many people leave their ISA decisions to the end of the tax year, as it is human nature to leave things until the last minute, Hollands agrees but says that investing early-on or throughout the year can make a lot more sense, as it provides the time and space for more informed decisions to be made and removes that cliff-edge pressure which some investors feel they are under as the deadline approaches.

“And, of course, the earlier you invest, the greater the potential to be making returns and tax savings since most years see positive returns,” he adds. “In reality there is no need to put yourself under such duress, as the tax year-end deadline is simply when an account needs to be secured and it is not the point when you need to put your money into the markets.”

Kay Ingram, director of public policy at financial planners LEBC made the point here recently that Brexit delays are not inspiring investors, but this should encourage sensible review of one’s investments overall.

“Looking for balance in a portfolio of investments to provide all weather protection is key,” Ingram advises, “Investors should also take a longer-term view and unless funds are needed for immediate spending, staying invested is likely to be the better long-term strategy. To some extent, stock markets are already priced for disruption and slower growth, so keeping calm and continuing to invest, is likely to be beneficial over the long term.”

Hesitating to invest in an ISA mean missing out on dividend returns. “Investing the full £20,000 at the start of the tax year enables more dividend income to be received tax free. Assuming an average yield of 3.5% on the FTSE All Share, a full year of dividends is worth £700 of extra potential income if invested in April. Investing early, before 12 April, would also enable funds to benefit from a ‘Brexit bounce’ should Britain’s exit be smoothed by a cross party consensus.”

Drip feed ISA investing

There are various terms for timing or delaying one’s investment – drip feeding is one readily understood. Pound cost averaging is an older term but covers also the idea of investing regularly over the long term and in principle minimising volatility because while fewer shares may be bought with your investment if prices are high, if the markets fall your will buy more shares when prices are low.

“Monthly contributions also reduce exposure to market volatility, by drip feeding money into the market, investors benefit from pound-cost averaging,” says Parsons. “Markets swing regularly and investments can fall as well as rise. By investing regularly, you can actually take advantage of this drop due to the ability to buy more units for the same investment.”

Taking the current market situation into consideration; Ingram concedes that some investors may be worried that a no deal exit from the EU could create a sharp downturn in GDP growth and prospective earnings, which negates any short-term currency gains. In this case she says, the answer may be for investors to drip their ISA investment in over a period.

“Most ISA platforms offer the option of a monthly payment by direct debit or bank transfer. This could mean investors avoid sharp losses if no deal sends international investors into a panic but they could miss out on any rise should a smooth exit be the outcome,” she says.

There is often a misunderstanding as to what sort of investor drip feeding suits best in terms of how much they have to invest. It is not the amount available for investment at any one time that is important.

“Drip feeding cash in throughout the year – either through a regular savings scheme or phasing in a lump sum – is a very sensible approach and should not just be seen as a merely an option for small savers, as it often is,” says Hollands. “Regular investing takes away the influence of emotional sentiment that can cloud rational thinking and drive inertia, and instead puts in place a hard discipline to just keeping on going, through the short-term ups and downs and irrespective of news events. This also materially reduces perceived risks associated with market timing, so that investors achieve a more average entry price into their selected investments across the year.”

For those willing to take a more active approach to managing their portfolio, funding an account with a lump sum and then phasing this in across the year provides the option of increasing the pace at which they deploy their cash into the markets on the back of any sell-offs or dips, says Hollands.

“When it comes to lump sum investing to is my belief that before investing new money into the markets, the first step should be to consider your existing assets allocation and therefore phased transactions should be used to help rebalance a portfolio, topping up those areas where allocations have fallen below a strategically desired weighting. I don’t think you need to go through a full rebalancing exercise every month; doing so quarterly or even twice yearly is more than sufficient. The important point is making sure your asset allocation doesn’t significantly drift from where you broadly want it to be and into a very different level of risk profile,” he says.

Early investor catches return

One of the reasons investors hold off investing is that rather than relying on averaging out the peaks and troughs of the market, they can invest at just the right time to buy low and make a good return.

“Investors can be tempted to put off making ISA contributions until the last minute, often attempting to ‘time the market’ – something that many investment professionals acknowledge as incredibly difficult to do,” warns James McManus, head of ETF research and investment manager at Nutmeg.

Research shows that over time you could be better off investing your full ISA allowance – or as much as you can afford to – as early in the tax year as possible, maximising ISA’s taxable benefits and compound returns. If an individual had contributed £6,000 to a medium-risk stocks and shares ISA on the first day of each tax year since 6th April 1999, they could have accrued £7,297 in additional returns compared to if they had waited until 5th April the following year, according to online investment management service Nutmeg.

“Of course, not all investors will have the full allowance to invest on the first day of the tax year,” says McManus. “But the good news is that you can still benefit from compounding returns by investing small amounts regularly, because our calculations show that contributing monthly is likely to generate better returns than leaving it to the last minute and making a lump sum contribution. For example, if you’d contributed £500 every month since 1999, you could have accrued £4,940 in additional returns compared to making a lump sum payment at the end of the tax year.”

Take care, not a punt

One may not be able to read the perfect times to invest but even when ‘drip feeding’ one should keep an eye on where one is invested not just each month or ISA season but across all of your portfolio.

As McManus says it is important to always remain focused on the goal of your investment, and the medium to long-term timeframe for which you’re investing.

“Volatility is a natural part of investing, and over time, as the value of each holding in a portfolio rises or falls in value (because of market performance), it will come to represent a larger or smaller proportion of a portfolio,” he says.

“Re-balancing is an investment management practice that simply ensures a portfolio stays aligned to its objectives. As a portfolio deviates from its original weightings, the risk of the portfolio changes too. And because higher returning assets tend to be higher risk, over long periods your holdings in higher risk investments are likely to become an ever-greater part of your portfolio, raising your risk above where you started from.

“Rebalancing involves buying and selling assets within a portfolio to retain the right proportion – or ‘weighting’ – of different assets in the portfolio, to match your objectives.”

There is much to consider around the psychology of investing and while everyone should consider carefully how they invest, over thinking as to when can be a negative.

“Emotional sentiment often drives investors to do the opposite of what makes rational sense and unusually so given how we behave in other areas,” says Hollands. “For example, when share prices tumble, many investors decide not to invest or even panic and rush for the exit door and so doing crystallise losses. Yet in other walks of life, for example, retail, we do the opposite – shops just have to slash the price of a TV or piece of furniture and people pile in to buy.”

Whether you have a little or a lot to invest consensus is that the key is to make sure you do it and do it regularly.

“The great thing about regular investing is that it removes the conundrum of sentiment and makes investing as routine as cleaning your teeth each day. It is just something you do without even thinking about it,” says Hollands.

Further reading:

A basic guide to the different ISA options

How to invest at any age – investment in an ISA

Powered by WPeMatico