Investing in an ISA doesn't have to be complicated. If ISA season leaves you a bit flustered here are 7 habits of successful ISA investors that can set you on the path to prosperity.
Habit 1 – Use your full allowance every year
The generous tax breaks of Stocks & Shares ISAs mean that an individual will be able to shelter £20,000 tax-free in the 2017-18 tax year. ISAs have been with us since 1999 and there is already a group of so called ‘ISA millionaires’ who’ve achieved this largely by using their full ISA allowance each tax year (see here).
Habit 2 – Make sure you are comfortable investing for at least 5 years
Successful investing is not a ‘get-rich-quick-scheme’. It requires patience and an understanding that capital values are volatile. But the longer the investment time horizon the less impact individual stock market cycles have on the ultimate investment returns. If you are not comfortable with investing for at least 5 years then investing may not be for you – consider a cash ISA.
Habit 3 – Successful investors have a plan….
This is key. For instance, by dripping automatically into the market they can avoid the urge towards market timing. One of the beauties of an automated strategy of regular investing (e.g. monthly) is that little judgment is required. Generally, the longer the market in which you’re invested goes sideways and down the better. As long as you have the timeframe to wait out the cycle you will be buying more and more at cheaper and cheaper valuations thereby increasing your profit potential.
Habit 4 – ...and discipline
There are many processes to pick and choose from. One strategy is to buy what is ‘cheap’ or undervalued by the market in the knowledge that its value will rise when the market catches up with the reality of the situation (value investing). It is not easy to identify what is ‘cheap’ but some funds (such as Schroder Recovery and M&G Recovery) attempt to do this.
Another way that we have built into FundExpert is momentum investing (buying well performing funds on the basis that they’ll continue to outperform for a given period). This is the approach used by George Soros and supported by a significant amount of academic evidence and research showing that it can generate significant returns. This research forms the basis of our Dynamic Fund Ratings.
For instance, if you had been able to invest your ISA allowances from April 1999 into a UK index tracker it would be worth about £306,505. If you used our Dynamic Fund Ratings it grew to £471,617 (6 April 1999 to 28 February 2018).**
Habit 5 – Set up a regular review
Cash ISA holders already grasp the idea that they need to keep moving their money in order to ensure they get the best returns. The same is true of the funds in a Stocks & Shares ISAs. By regularly reviewing their funds investors minimise the chances that they will languish in underperforming funds. No fund manager will outperform in all market conditions but our research shows that reviewing funds just once every 6 months dramatically boosts returns.
Habit 6 – Don’t panic
They understand the difference between ‘risk of capital loss’ and volatility. Volatility is the natural movement of market capital values, both up and down. This will only lead to a capital loss if investors are frightened into cashing in their investments when capital values dip. Successful investors understand this difference and are not led by their emotions, instead sticking to their robust investment process (#4) and review cycle (#5).
Habit 7 – Don’t focus only on charges
There is a tendency among investors and the financial consumer press to obsess over fund charges and platform fees. While reductions in charges and fees over the years has helped investors they should first and foremost seek outstanding performance after charges. Those who only focus on charges are being distracted from what is important to dramatically increasing investment returns - that which is described by behaviours 3-5.
FURTHER READING
** The Total Value is based on investing your full ISA allowance, which totals £186,360 up to the 2017/18 tax year.