10th March 2015
With less than a month to go before the end of the current tax year, Maike Currie, associate investment director at Fidelity Personal Investing highlights seven ISA sins, which investors should avoid…
1. Relying on past performance
Past performance numbers in isolation give no indication of a fund’s credentials going forward – a previous year’s figures will only show that you should have bought the top performing fund a year ago. You need to carry out some qualitative analysis to find out how this performance was achieved. Look at issues such as charges and in the case of an income fund the likelihood of the fund growing, or at the very least maintaining its dividend payment. Also examine the manager’s track record and experience. Has the manager been producing good returns in different cycles, or only in rising markets? How stable has their career been?
2. Staying in cash
With interest rates languishing at rock-bottom levels for six years running, investors need their investments to work even harder to generate a decent level of income. Holding your money in cash can result in very limited returns over time. Fidelity Personal Investing calculates that if a saver had invested £15,000 into the FTSE All Share index over the 10 year period from 28 February 2005 to 27 February 2015, they would now be left with £31,889.69. If, however, they had invested £15,000 into the average UK savings account* over the same period, they would be left with £16,321.36*. That’s a difference of £15,568.33 – too big for anyone to ignore.
3. Confusing volatility with risk
If you had to sum up the market in 2015 in one word, it would be ‘volatile’. We have enjoyed a bull market for a number of years now, and as bull markets mature, volatility does tend to increase. Corrections over the course of a bull market are normal, often setting the foundations for the next upswing. Don’t get spooked out of the market on bad days. Rather stay invested, be patient, brave and buy the dips. In the words of Warren Buffett: ‘Be fearful when others are greedy and greedy when others are fearful.’
4. Putting all your eggs in one basket
The best protection against market uncertainty is diversification. A stocks and shares ISA allows you access to a spread of investment vehicles such as bonds, equities and funds. Yes, this is a more risky option than a cash ISA, but the true value of a stocks and shares ISA tends to manifest itself over the long term, with returns superior to that offered by a cash investment.
5. Following stock market truisms
Most market adages, especially those based on the time of the year should be treated with caution. Sometimes they work and sometimes they don’t. It’s very 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 capture the worst days while missing out on the best. Remember: time in the market matters more than timing the market.
6. Not looking under the bonnet of the funds you hold
Make sure you look under a fund’s ‘bonnet’ and find out what companies the manager is investing in. Check that the companiescan demonstrate sustainable growth, operational diversity and good management. Investing in funds focused on good-quality companies with strong balance sheets paying an attractive level of income will pay off in the long term.
7. Ignoring hidden charges
Watch out for platforms that appear to be low cost, but pile on additional charges later down the line. Fidelity Personal Investing does not charge exit fees as we believe investors should be able to choose where they invest, and move if they want to, without suffering a penalty. Furthermore, we don’t have fees for requesting a printed valuation statement or for using our UK call centre. You shouldn’t be afraid to dig into the detail of what platforms charge – it will make a marked difference to your portfolio returns over the long term.