The ISA ‘early bird’ catches the worm
Last week saw the annual eleventh hour rush of applications for ISAs and pensions. At Bestinvest we saw over £100,000 invested through our website during the last half hour of the tax year. In fact, the final investment was made at 11:59pm on Saturday 5 April, just one minute before the end of the tax year when their allowance would have disappeared forever.
It is human nature to leave important decisions to the last moment – and we estimate that almost 40% of people invest in their stocks and shares ISA in the last three months of the tax year – a large chunk of which is in the last fortnight.
In comparison, around a third of Bestinvest’s clients began investing in April 2013. Not only does investing earlier in the tax year remove some of the pressure to make a hasty decision, it also means your hard-earned cash is put to work for longer. Data shows that in seven of the last ten years (April to end of March), the FTSE All Share Index delivered a positive return, meaning that ‘normally’ the earlier you invest, the better.
So perhaps it is time for more of us to join the ranks of the investors who open their ISAs at the start of the year or take the timing out of the process altogether by investing on a regular basis. After all, as the saying goes “the early bird catches the worm” and in the case of a stocks and shares ISA there is a whole year of potential returns to be had.
The new tax year is also a time to take stock of your investment strategy at a time when a lot of the “white noise” and hype has quietened down. So, before you invest in makes sense to get out the feather duster and give your portfolio a ‘spring clean’. This should involve looking at where your asset allocation is positioned, since this will have drifted over time as returns have differed across various markets and investments, understanding how much risk you are now exposed to, and checking that each of your existing holdings still deserves a place in your portfolio.
Rebalancing your portfolio and weeding out any underachievers should also help you identify where you should be targeting any new investments so that they will compliment your overall strategy. And then once you have decided where to invest, consider doing so regularly through a monthly savings scheme or a series of lump sums. That should help reduce market-timing risk as you’ll end up with ‘pound cost averaging’, an average entry price that reflects some days when the market is up and others when it was down.
Investing regularly also takes the emotion out of investing: it is easy to have your investment decisions clouded by current sentiment or events that shouldn’t really matter if you are investing for the long-term. Regular saving is a great discipline.
The value of investments can go down as well as up and you may get back less than you originally invested. This article does not constitute personal advice. Different funds carry varying levels of risk depending on the geographical region and industry sectors in which they invest. You should make yourself aware of these specific risks prior to investing. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change.