Cash is the safe haven of choice for millions of Isa savers who prefer it to the volatility of investing. But they could soon be steered into the stock market if they want to keep the generous tax benefits of an Isa — whether they like it or not.
Last week the government confirmed that it would be reforming the Isa system to “get the balance right” between cash savings and investing, and to “boost the culture of retail investment”.
Every adult has a £20,000 annual Isa allowance, which can be split between the different types of Isas, where any interest earned or investment growth is completely tax-free. Roughly eight million savers pay into a cash Isa each year, and about four million use a stocks and shares Isa.
Investment firms have been lobbying the chancellor, Rachel Reeves, for a cap on the cash Isa allowance of as little as £4,000 a year, to push those looking for tax-free savings towards the stock market.
For many savers though, the dive into investing will represent a steep learning curve. Almost one in five adults have “never heard” of stocks and shares Isas, according to polling by the Investment Association, while a quarter said they had heard of them but knew nothing about them.
Whether you are investing in a stocks and shares Isa for the first time, or just need to brush up on your skills, here is everything you need to know.
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Step one: decide how much to invest
There is always a level of risk when you put your money in the stock market because, unlike with cash savings, the value can go down as well as up.
It is generally worth keeping some money in cash alongside any investments. This should be your rainy day fund — experts suggest between three and six months’ worth of expenses — as well as any money earmarked for short-term goals, such as weddings or renovations.
Money that you do not need for at least the next five years could be better off in your stocks and shares Isa because equities typically perform better over time. US equities have returned 6.8 per cent a year in real terms over the past 50 years while UK stocks have returned 5.4 per cent, according to the Barclays Equity Gilt study. Cash returned just 0.7 per cent.
Step two: pick your platform
While you can usually open a cash Isa with your high street bank or building society, you will need to use an investment platform for your stocks and shares account. These are essentially online supermarkets where you add and withdraw money and choose your investments.
First and foremost, check how much using the platform will cost you. Platforms typically charge a percentage of how much money you have invested, ranging from about 0.25 per cent to 0.5 per cent, or a flat fee in pounds and pence. You then pay dealing charges when you buy or sell investments.
These numbers might seem small, but they can eat into your returns over the long term. Say you have an Isa worth £10,000 and you make 3 per cent a year in investment growth. After 30 years of paying 0.5 per cent in fees, your Isa would be worth about £37,500. If you paid 2 per cent instead, it would be worth just £24,300.
Percentage fees are typically cheaper for those with smaller portfolios but become increasingly expensive as your portfolio grows, while flat fees are better value if you have a larger portfolio.
For example, a £5,000 portfolio costs £23 a year with Hargreaves Lansdown, which charges a percentage, or £150 a year for Halifax Share Dealing, which is a flat fee. A £100,000 portfolio costs £450 a year with Hargreaves Lansdown, but Halifax’s platform still costs £150.
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You should also think about how often you plan to add to your Isa or tweak your portfolio because this will determine what you pay in dealing fees. With charges of between £1.50 and £12 per deal, the bill can quickly rack up. It is best to choose a platform with lower dealing fees if you plan to make a lot of trades, or focus on the ongoing charge if you plan to leave your Isa untouched most of the time.
It is also important to make sure that your platform meets all your wider needs. Each site will have a different range of investment options, and some offer how-to guides and fund picks to help get you started.
Above all, you need to be comfortable with the company that is holding your money. Download its app or visit the website to make sure that you can navigate the site easily, or call the customer service line to see how easy it is to speak to a human before committing to opening an account.
Step three: create your portfolio
Creating your portfolio can be as simple or as complicated as you like. You could opt for one fund or as many different single stocks as you like, it comes down to personal preference.
The main thing to consider is diversification — the idea that you can protect yourself from serious losses if you have exposure to different asset classes from different regions. In other words, to avoid putting all your eggs in one basket.
Jason Hollands from the investment platform BestInvest said: “As a first-time investor it is easy to be swayed by exciting stock or fund ideas, or dazzled by whatever fund has had an impressive run of performance.
“But if you are playing a long-term game, then an important principle is diversification. None of us have a crystal ball, so spreading your investment net widely makes sense.”
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What your diversified portfolio looks like then depends on you: how long you will be invested, and your risk tolerance. As a general rule of thumb, the longer you have before you need the money then the more exposed to equities you can afford to be.
If you do not need to get at the money in your stocks and shares Isa anytime soon and feel comfortable investing, you could opt for a 100 per cent equity approach, where your whole portfolio is invested in the stock market. To diversify, have exposure to different countries’ stock markets, such as the US, UK, Europe and some emerging markets.
The cheapest and easiest way to do this is with a global tracker fund, such as Vanguard’s LifeStrategy 100% Equity fund or BlackRock’s MyMap range, where the investments are chosen by algorithm, based on the holdings of an index.
Other options include active funds, which are run by expert stockpickers and are typically more expensive, or choosing individual stocks yourself. If you go DIY, make sure you have the time and knowledge to read company reports and keep on top of the companies you pick.
If you have a shorter time to invest, or want less exposure to the stock market, then you might want to include other assets, such as bonds, gold or property, to diversify your portfolio.
An easy option would be a multi-asset fund. These are ready-made diversified portfolios that are usually risk-rated, so you can pick which level feels comfortable. You could also build your portfolio yourself by choosing individual funds for different assets.
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Step four: leave it alone
As a newbie investor, it is easy to fall into the trap of checking your portfolio every day or panicking when news headlines announce stock market falls, but the best thing you can do for your money is to forget about it.
Financial planners typically suggest that you check your portfolio once every three months. Any more frequently and you risk making kneejerk reactions, increasing your chances of selling at the bottom of the market, locking in losses and missing out on any bounce back.
“As long as you have a diverse portfolio that reflects your approach to risk, you don’t need to get stressed when there are market wobbles,” said Sarah Coles from Hargreaves Lansdown. “This is all part and parcel of long-term investing. Just stick with it, and over time as your investments grow, you’ll soon forget the short-term ups and downs.”
