Investment Strategies: How to put together the best strategy for your ISA investments

Right, so you have taken the plunge and decided to make the most of your tax-free allowances and buy an ISA.

How do you make sure you that you make the most of the opportunity and best plan for the future?

The key thing to consider is what your investment goals are, what level of risk you are willing to tolerate and whether you are likely to need the money soon. If your starting point is as a 30 year-old you are likely to have a very different investment outlook to a 65 year old facing retirement.

Paul Ilott, a senior investment adviser at Bates Investment Services, explains: “The first step is for investors to understand what they want to achieve from their investments, the timescale they are looking to invest over and whether there is a specified level of growth that they need in order to achieve their objectives.”

ISAs work best as a long-term investment and advisers generally consider you should be looking at a minimum time horizon of five to seven years. If you need to be able to access the money in just one or two years, or cannot afford to lose any of your capital, then you should always opt for a cash ISA.

Even with an instant access cash ISA, you may miss out on guaranteed bonus rates if you withdraw your money early, but at least your capital is not at risk.

We have all seen in recent months just how volatile the stockmarket can be and if you need to access your fund in a short time period, you can end up locking in early losses that would have been made up over the longer-term.

If you do opt for a stocks and shares ISA it is important not to see it as distinct from the rest of your financial planning.

Patrick Connolly, a certified financial planner at financial advisers John Scott & Partners, says: “I would say that it is a mistake to look at your ISAs in isolation. What you need to do is look at them as part of a bigger picture with all of your other investments as well. And when you are looking at asset allocation, you shouldn’t just be looking at the asset allocation of your ISAs, you should also look and see how that fits in with your other investments.”
He adds that one of the problems with ISA investing is that so many of us leave it until the last minute.

This has led to the emergence of the ‘ISA season’ when fund managers will tend to advertise their flavor of the month portfolio heavily. Connolly says the risk is that rather than properly research the market and ensure a fund is the right match to their overall risk profile and existing asset allocation, people will buy into the hype.

This has been seen all too often and many investors will have painful memories of poorly timed investments in technology funds at the turn of the century, and more recently, commercial property funds.

“The key is not to pick individual funds. The key is to get the right overall balance. Of course, you can look at individual funds beyond that, but don’t make the mistake of thinking, ‘I fancy a bit of China, so I’ll pick a Chinese fund’,” Connolly says. “It is a case of looking at the overall picture and asking where you should be getting more exposure or changing the level of exposure that you already have.”

This means that ISAs should be considered alongside the asset allocation of your pension fund and any other investments you hold. As a rule of thumb, the longer your time horizon, the higher amount of equity exposure you should go for.

How you structure the asset allocation in your overall portfolio also very much depends on whether you are investing for income or for growth.

Corporate bond and gilt funds receive very favourable tax treatment within an ISA wrapper as all payouts are free of income tax. UK equity income funds can provide decent levels of both income and capital growth but dividend payouts will be subject to a 10 per cent tax charge at the fund level.

Many investors opt for a blend of the two to provide a more diversified income stream as the equity and bond markets often tend to move in different cycles.
For growth investors, a key decision is how much risk they are willing to accept. Emerging markets, such as Russia, China and India, tend to deliver much stronger returns during times of boom as they are able to grow much more quickly than the more mature economies of the likes of the UK, Europe, Japan and the US.

The flipside is that they are more volatile and normally fall much more sharply in a downturn, as we have seen over the past two years.

Tim Cockerill, head of research at Rowan & Co Capital Management, is a staunch advocate of a more balanced approach. He says: “You can actually, in most instances, create a balanced portfolio with almost as much growth potential as one that is unstructured and has a bias towards, let us say, emerging markets. You have seen that China is dong well and that Chinese investments are doing well, you have seen that India is doing well, you have seen that Russia is doing well. That is why you need to take a step back and be sensible.”

Using fund supermarkets to build an ISA portfolio can help you to create a more balanced portfolio more easily. They offer thousands of funds from a range of different fund managers enabling you to blend together the best individual managers in each asset class or region.

Of course, many people have neither the time, nor the experience to build their own portfolios.

James Davies, investment research manager at Chartwell, points out: “Because there are so many different funds available it can be a bit of a minefield when it comes to selecting the right one.”

Indeed, many experts recommend that investors seek advice unless they are willing and able to continually monitor their portfolios.

Ilott says: “If they want an active involvement in their investments, then they should be prepared to actively select and change the underlying fund holdings periodically. Otherwise, they might want to hand that responsibility over to an IFA or, alternatively, even invest in a multimanager fund, where they are handing over the entire responsibility for running the underlying funds to a third party.”

Connolly agrees that seeking advice is a good idea.

“Our view is that the vast majority of people probably shouldn’t be doing it themselves, because they haven’t got the time, the resources or probably the knowledge to do that,” he says. “Now I’m sure that there are many individuals out there that would disagree with that and claim that they are able to do it themselves, but in terms of the clients’ portfolios that we see, very often they are out of kilter with their risk profile and typically that means that they hold too much in equities. That is why your ISA needs to be considered as part of your overall range of investments, to make sure that it matches your risk profile and will hopefully achieve your objectives.”

So, it is basically a question of understanding what you want to achieve, how long you have to do it and how much volatility you can stomach along the way. Getting right is important and if you are one of those people who has never reviewed any of your previous investments, it might be wise to stump up for some professional advice.

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