Adrian Lowcock, senior investment manager at Hargreaves Lansdown, Jason Hollands, managing director of communications at Bestinvest, and Darius McDermott, managing director at Chelsea Financial Services, share their top tips for how investors can make the most of their ISA allowance this season.
Reappraise your objectives
Defining and setting objectives is a key part of any investment strategy and Hollands (pictured) says this is especially important when it comes to building an ISA.
He says investors need to think about their time horizon and what their ultimate goal is before sinking their money into potential duds. "The longer [your time horizon], the more equity exposure you can have," he said.
Hollands adds that whether people are seeking income, growth, or all-out capital returns should determine what type of investments they choose and how they allocate their ISA allowance.
McDermott adds that short- and long-term goals can change and investors should review them each ISA season. He also says reviewing risk tolerance is a key step when determining objectives.
Review your existing portfolio
The next thing investors need to consider is how their existing ISA has changed over the previous year.
“Asset allocation and fund weightings drift over time, so it is important to periodically rebalance as well as reaffirm the case for continuing with your current holdings,” Hollands said.
“By doing this, you will also have a better understanding of where your portfolio is currently weak and therefore where you should focus new investments.”
Key questions to ask yourself are:
- Do you have the right overall mix between bonds, equities, property, cash and alternatives?
- Do you have a well-balanced geographic breakdown in your equity exposure?
- What is your split between large / small and mid cap stocks?
- Is your portfolio too heavily skewed to one style, such as value or growth?
- Are there individual funds that are not delivering and that may need to be switched?
- Can you reduce the costs in your existing portfolio?
Check for charges
After setting objectives, the next most important thing to consider is what the impact of charges will be on overall returns.
"For most people an ISA will be a long-term investment, over which charges could be a significant drag on performance of your investment,” Lowcock said. “So make sure you are not paying any initial commissions and pick funds that do not have high annual management charges."
Hollands adds that investors who do not have new cash to invest this year should consider utilising their capital gains allowance to sell non-ISA holdings and use the funds to take out an ISA, where future returns will be tax free.
Investigate the options available
"One of the major advantages of ISAs is the choice available," Lowcock said.
"Review your ISA investment range as some providers offer more choice than others. Does your provider offer access to unit trusts and low-cost share dealing as well as access to exchange traded funds (ETFs)? Investment choice will help drive the value of the ISA portfolio."
Finding the most attractive valuation is the next step, according to Hollands, who says equities are currently better value than bonds – particularly in Europe and emerging markets.
"Don’t buy last year’s top-performing market unless there are compelling reasons to believe it is still attractively valued and the prospects remain strong," he said.
He adds that investors should select funds in the most attractively valued areas, but should be wary of chasing past performance.
Hollands also encourages investors to seek alternatives to traditional unit trusts and OEICs.
He suggests a SIPP (self-invested personal pension), which could offer tax benefits that would otherwise be sacrificed.
"If you are saving specifically for retirement and are a 50 per cent taxpayer, this may make sense as currently you could pay 50 pence for a £1 investment," he said.
"Either put your ISA in an existing investment you like in your portfolio, or choose a new one. Anyone with less than £100,000 should really only have a maximum of 10 to 15 funds, so don't over-diversify," McDermott warned.
Determine the role of advice
Hollands says investors need to decide whether they are comfortable making their own investment decisions or whether they need to seek advice. He says they need to keep in mind that under the regulatory regime that came in to force at the start of the year, the cost of advice is now more transparent.
In light of this change, Lowcock says investors need to take advantage of the abundance of free research in the marketplace.
"Make sure you can access market-leading research," he commented.
"It is important to create an investment plan, focus on the right fund managers – remember to follow the manager, not the fund. Along with good fund choice, asset allocation is an important factor for delivering your long-term financial goals. Make sure you have the right mix of investments."
He says beyond online investment research organisations, the financial pages of newspapers also feature valuable information.
Earn a loyalty bonus
"Annual loyalty bonuses have become increasingly common for adult ISAs and investments, but few providers have extended the same rewards to the Junior ISAs," Lowcock said.
"Make sure your ISA rewards long-term investment. A typical rebate of 0.25 per cent per annum on an ISA contribution of £11,280 could save you £394 over the next 10 years."
Consider what services you will need in the future
Depending on where you are on your investment horizon, you may only need an ISA; however, Lowcock says considering your future needs is key when picking a broker.
"While you might be looking for an ISA today, it is important to keep in mind that you may want to use your broker for other services in the future, possibly starting up your own SIPP or share trading, so using a broker who is able to offer all those services is essential," he said.
Review individual funds/stocks
Taking a look back at how you have performed in the past can help you to invest better in the future, according to Lowcock.
"Investment performance is the most important factor for investors so get a clear understanding of what you want to achieve," he said.
"For example, I plan to retire in 10 years’ time and would like the investment to grow until then and provide me with an income, but as I am only working for another 10 years I don’t want to take big risks on losing the capital."
Investors need to think about how much money they need to put in to achieve their desired goals.
McDermott says anyone who is unhappy with the performance of their holdings should consider switching.
"This can be done free of charge with some companies," he added.
Decide which wrapper/platform to use
With a plethora of wrappers and platforms in the market, determining which one to use can be a daunting task, but Hollands says putting all your investments in a single account is useful.
"It can give you a greater sense of control. It rarely makes sense to buy a management group’s in-house ISA product," he said.
"Brokers, as well as platforms, enable you to select from a wide range of investments. Key points to consider are access to tools and research (if you need them) and, of course, costs."
McDermott echoes Hollands’ view and says you should consider consolidation if your investments are in different places.
"Platform re-registration is up and running now so you won’t have any time out of the market and could be rewarded for putting your money in one place, as many platforms provide incentives," he said.
Go online if you are running late
For the inevitable few that put off their ISA application until the last minute, Hollands says they need to think about whether using the traditional postal method could see them miss the deadline.
"If you are running close to the tax-year deadline then don’t be caught out by postal delays. The surest way to beat the deadline is to invest online. Make sure you have cleared funds in your account and don’t forget you will need your National Insurance number," he said.