25th March 2015
With just days left until the end of the tax year on 5 April, the deadline for investors to use their £15,000 ISA allowance is drawing ever closer. To help investors sidestep the usual pitfalls of last minute ISA investing, Jason Hollands, managing director at Tilney Bestinvest lays out five practical steps…
1. Don’t rush in without considering your overall goals
Hurried decisions are rarely good ones and at this time of year it is easy to get swept up by the cacophony of ‘expert’ tips or dazzled by whatever market or fund has been performing well of late. It’s really important however to step back a little and think about what you are trying to achieve; growth, income or a balance of both, the likely time horizon you anticipating being invested and the level of risk you are prepared to take.
If all of that seems a big ask with just days to go, then there is no need to panic. You can fund your ISA ahead of the deadline, parking your investment in cash, and choose your investments later, once you have had time to calmly consider your objectives and the investments best suited to achieving them.
2. Think about asset allocation
The process of how you divide your portfolio up across different categories of investment, such as shares, bonds, property, cash and commodities and geographic markets is known as asset allocation. Many investors skip over asset allocation, however numerous studies have concluded that well over 80% of the variances in portfolio returns come from asset allocation decisions rather than stock selection, so it is important to invest some time thinking about it.
One of the most common mistakes made by investors is to treat each year’s ISA choice as an ad hoc selection, which can mean that over time they accumulate collections of previously fashionable ideas, rather than building a well-structured portfolio that works together.
In particular, it is vital to consider how any new investments will fit alongside those you already own. Even if all the ‘experts’ are tipping a particular market, it may not make sense for you to invest into a new ISA there if you are already very heavily exposed to it. It could also be the case that your portfolio was well balanced a year ago but has since drifted over time, as markets and asset classes perform at different paces. This can mean a more cautious portfolio could progressively become higher risk or vice versa and may no longer best suit your goals.
3. Diversification is good but be disciplined
Asset allocation is about diversification and it also makes sense to invest across multiple funds from different companies, as no management group has a monopoly on talent. Once you have decided on the right asset allocation approach, carefully select individual investments that will help you achieve this. These might include funds, investment trusts or Exchange Traded Funds; actively managed choices and low-cost ‘passive investments’. Choose the right investment for each part of your portfolio.
4. Consider a managed option
Some investors start out enthusiastically picking and managing their own investments but over time find they neither have the time or inclination to become their own fund manager. If that sounds familiar, don’t worry, you are part of the ‘silent majority’ who are looking for an investment not a weekend hobby. The good news is that these days you don’t need a fortune to have a managed portfolio, as there are plenty of multi-asset funds available which invest across different markets and asset classes to suit investors with different goals and risk profiles.
5. Don’t be late
This year’s tax year deadline falls on a Bank Holiday Sunday, so if you are planning on posting ISA application forms, you do need to bear this in mind. To maximise your chances of making a successful application, it makes sense to utilise the Royal Mail’s Special Delivery service which commits to next day delivery with online tracking. Of course, the quickest way to invest in an ISA is online, and you will receive instant feedback on whether your application has been accepted.