You can hardly miss the blizzard of Isa adverts from fund companies. The message is ‘use it or lose it’, referring to the £10,200 stocks-and-shares Isa allowance for the 2010-2011 tax year, which ends a week on Tuesday, April 5.
The annual blitz might be good at bringing in new money for fund managers, but it also has the effect of encouraging investors to make hasty decisions – putting savings into this or that fund and over the years ending up with a jumble of holdings that do not work together.
Kevin Deamer, financial planner with KMD Wealth Management in Stansted, Essex, says: ‘Stocks and shares ISAs are primarily of value to higher-rate taxpayers, so not everyone needs them.
‘But if investors are going to use their allowance, they should do so in a way that doesn’t alter their overall goals. If you simply respond to all the adverts or the streams of fund recommendations issued by brokers – investing in China funds one year and technology the next – the level of risk you are taking will fluctuate wildly.’
The answer? Avoid the sales hype, focus on your personal needs – and follow a plan.
FIND THE RIGHT MIX
Before any money is allocated to equity investments (shares and bonds) savers need cash or cash-type reserves – and plenty of them. These include cash ISAs, savings accounts or Premium Bonds.
How much is enough? Kevin Deamer of KMD Wealth Management says: ‘There is no correct answer. We start by asking our clients what is the minimum cash savings amount below which they would start to feel nervous.
‘We work towards putting a figure on that and then we add any ad hoc expenses that they expect to face in the next three years, plus a small safety buffer of ten to 15 per cent’.
By maintaining a comfortable level of cash-type savings, investors are protected from the short-term volatility that can affect their equity holdings.
After that, it is a matter of spreading the risk by using bonds and property as well as shares.
Financial planners first find out what risks a client is prepared to take and their objectives.
Their money is typically invested according to a range of model portfolios where the mix will stay the same unless the client’s circumstances change (say through inheritance or divorce). Future years of Isa contributions will be allocated in the same, planned way.
Nic Round of Murray Round Wealth Management in Shrewsbury, Shropshire, says: ‘The most crucial part is to establish a plan. What do you want your investment to achieve, and by when?’
Many factors determine the answers to these questions, for example the age of an investor and any expected expenses (such as mortgage shortfalls, school fees or retirement). Future earnings or anticipated inheritances will play a part, as will outside factors such as inflation.
Broadly speaking, the longer the money can be tied up, the more ‘aggressive’ the investment mix can be. This will mean putting more in riskier assets such as shares, commodities and property and less in cautious assets such as bonds.
Deamer says: ‘If you expect to need the money in four or five years, you should take less risk. However, if it’s going to be there for 15 years then by all means take greater risk – but expect bumps along the way.’
An ‘aggressive’ mix, according to Deamer, would be 40 per cent in UK shares, 40 per cent in overseas shares, 12 per cent in property and eight per cent in commodities. A ‘balanced’ mix would have 24 per cent in each of the first categories, 40 per cent in fixed interest (bonds), eight per cent in property and four per cent in commodities. A ‘ defensive’ portfolio is 100 per cent invested in fixed-interest assets.
Neil Rosenburgh, 30, from Winsford, Cheshire, is an industrial chemist working for a global mining and minerals business. With decades of earnings ahead of him he can afford to be aggressive with his portfolio.
Neil uses an investment service from JPMorgan Asset Management and through his Isa owns investment trusts managed by JPM that invest in China, India and Brazil. A high proportion of all his investments is in overseas equities.
PICK THE BEST
Once you have drawn up a rough plan of what should go into your Isa portfolio, how do you choose the actual ingredients?
Equity Isa accounts can hold all sorts of funds – there are thousands to choose from – as well as shares in individual companies.
Many financial planners, such as Nic Round, believe cost is one of the biggest issues for long-term investors. Round is also sceptical about fund managers’ claims to be able to beat the markets, so he favours lowcharge funds that track stock markets, such as exchange-traded funds (ETFs).
A rival camp believes just as strongly that dearer, actively managed funds are better. These are most likely to be advertised or promoted by brokers in lists of ‘best buys’.
But beware – some companies, including the highly successful Hargreaves Lansdown, are paid commission by fund managers. Their lists of best-buys will include only commission-paying funds. Hundreds of excellent alternatives, such as investment trusts, are excluded.
The table, above right, is a brief list of respected funds that Financial Mail has selected across five asset categories. The funds shaded green are costlier, actively managed unit trusts, all with exceptional records. Those shaded blue are actively managed investment trusts, again with strong records, but with lower costs than unit trusts.
The yellow alternatives are exchange-traded funds that simply mirror a market. These are often the cheapest options – in some cases, a quarter of the cost of unit trusts.
For further information on these various fund types, and much more, go to thisismoney.co.uk/investing.
STAY THE COURSE
One of the toughest tests for investors is to stay calm when markets are volatile and the value of their holdings plunges.
‘Markets can and do fall violently, as we have seen recently with Japan,’ says Deamer. ‘But if you have invested for the right reasons, with an appropriate buffer of cash and no immediate need for the money, you should be insulated from the shock and be able to sleep at night.’
Speculative investors – those who piled in thoughtlessly, perhaps on the back of an advert or casual recommendation – are more likely to panic sell.
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