My 10 key reminders for ISA investors
- Building your ISA confidence starts with getting to grips with what the account offers as well as what goes inside it.
- Having a plan from the outset can help you decide which assets are right for you, and can make the market’s ups and downs easier to deal with.
The value of your investments and the income you receive from them can go up and down, and you may get back less than you invest. Any examples are for illustration purposes only. ISA eligibility and tax rules apply.
ISA investing is a great leveller. Whether you’re a first-time ISA investor or a seasoned stocks and shares ISA holder, you’re given the same market every day, with the same allowance as everyone else and the same opportunity to invest. Granted, we all have different amounts we can actually put into our stocks and shares ISA but why do some people feel so much more confident about the whole thing when we’re all given the same guardrails?
A big part of the confidence gap is taken up by recognising what you can and can’t control, and remembering the ins and outs of stocks and shares ISAs. here are 10 ISA principles to keep in mind for that added confidence boost:
1. Your stocks and shares ISA is the wrapper, not the investment
Turns out school dinners help explain tax-efficient savings accounts, who knew? If you had a hot meal in the lunch hall you likely had pretty much the same as everyone else. That’s the UK cash ISA scene - turkey twizzlers all round and similar levels of interest wherever you look.
The packed lunch game was different. Each lunchbox carried its own, personally curated, mix of assets with the groans and fist pumps demonstrating how successful each selection was. That’s our stocks and shares ISA - you choose what goes in it, which ultimately determines the investment returns, while the box itself offers tax benefits for UK investors.
2. Respect risk, don’t fear it
Risk isn’t the same thing as danger. It’s more about questioning how likely it is that an investment will fall to zero. That might widen a few inexperienced eyes (fair enough, really) but not all stocks were created equal. Think about the listed companies out there - are all of them just about to fail? Or, are there firms offering relatively stable revenues with high margins, good products and services, and management you can trust?
Read more:
Reframing risk: five points to clear the fear
Inflation and investing to beat it
How to handle volatility
Getting to grips with risk management by deciding how much you invest, how often, the mix of assets you select and how much cash you plan to hold can all help soften the ups and downs. And don’t forget, the ever-nibbling effect of inflation means your cash holdings could be quietly falling victim to a risk of its own. All in all, risk isn’t something to be scared of - it’s very much part and parcel of long-term investing.
3. Volatility is the price of entry
A cousin of risk is volatility, which is more about the ups and downs that come with all investing than the outright risk profile of a stock or market. It’s normal and is the price we pay for the hopeful long-term outperformance of stocks over cash. Again, we can try to reduce the volatility in our stocks and shares ISAs by holding different assets that might respond differently to the world and whatever crops up next.
4. Time, not timing
Fortune-telling skills not developing as you’d hoped? Join the club. Rather than trying to guess the best times to jump in and out of the market, though, it might be worth steering clear of predictions altogether. Investing set amounts at regular intervals means you’ll catch high and low prices, smoothing out your returns over time. Crucially, your invested money will have the chance to generate interest, and then generate interest on that initial interest, compounding over time - an effect you just can’t achieve by constantly yo-yoing in and out of the market. The good thing is this regimented and simple approach tends to do well over the long term, while catching the market peaks and troughs is nigh-on impossible.
5. Assets, assemble: start simple
Once you’ve decided the right balance between your goals, risk tolerance and time horizon, it’s time to choose the assets to put inside your stocks and shares ISA. This can be where investors flood their portfolios with any stock they like the look of, and it can also be where others freeze for fear of choosing the ‘wrong’ stock. Like most things, somewhere in the middle tends to work well.
Read more:
Your £0 to £100,000 investment journey
Invest for life: setting your schedule
How to pick ‘forever’ stocks
The main thing is your blend of assets like stocks, bonds and cash should match your personal situation and should offer a route to growth as well as a bit of a cushion if one side of your portfolio suddenly falls ill. Keep your high-level blend of stocks, bonds and other assets in mind before you go share shopping. That overall mix sets the course for your journey so the more you change it by pushing up the percentage of one type of asset in your ISA, the more chance you have of your journey and results changing too.
If you’ve decided that a 50/50 stock/bond split suits your financial aims and tolerance for risk, veering off into a 75/25 portfolio isn’t doing your original objectives justice.
6. Diversify, diversify, diversify
And, from thinking about the asset groups to the assets themselves - what a neat segue that is. You might have a portion of your ISA reserved for stocks but, with the thousands to choose from, that doesn’t exactly narrow things down. Again, work backwards from what your financial goals, time horizon and risk appetite need from your portfolio. A journey focused on hopefully steady returns could mean a preference for dividend compounders, while a growth-focused strategy might involve companies reinvesting that cash rather than paying it out. Your aims should give you an idea of what you’re looking for.
It can take a while to build a team that ticks all the boxes so try to get the selection process right first. The stock screeners on your app could help identify the characteristics you’re particularly interested in, and they might just stop you judging books by covers. Filtering by dividend yield, analyst rating, price-to-earnings (P/E) ratio or sector, and then getting the bigger picture on the individual stock pages, can be a useful way to see what’s out there and, most importantly, what might suit you.
Read more:
How to pick your first stock: our five-step guide
Six things to do before you start investing
How to spot a pump and dump scheme
The headlines are constantly filled with the latest ‘hot’ stock but just remember your portfolio is a privileged place for any asset and they all need to go through your filter first. Getting that part sorted can give you peace of mind that you’ve always got your situation in mind when selecting stocks, rather than being pushed around by the latest market story.
7. Costs can compound, keep an eye on them
Account fees, trading charges, platform costs - they all add up. And, even if they don’t seem that high to begin with, they’re still chipping away at the money that could otherwise be compounding for you instead of against you. Subtle fees won’t necessarily scream up front but they can certainly whisper for decades - be sure to do your homework.
Make sure your stocks and shares ISA provider states their fees clearly, isn’t charging you for services you don’t want and offers a great product for whatever costs are on the table.
8. Behaviour, not brilliance
Remember the old saying about not being able to step into the same river twice? That. The market is constantly changing, which brings out the impulsive side in some of us and the scared-stiff version of others. So, the fact that we know the former is never going to change means we need to take control of the latter.
Read more:
Overcoming FOGS: the fear of getting started
Gambler’s fallacy: the odds are lying to you
Lump sum or regular investing?
Focus on your own investment approach, set out to recognise your own behavioural biases and put strategies in place to reduce the chance of your emotional state taking the reins. A lot of investors go their whole lives thinking the market is there to be wrangled when really it’s ourselves we need to get a hold of first.
9. Remember your ISA basics
We’ve all seen those images of traders with six screens, seven coffees and tickers flashing at them like the Blackpool illuminations. Makes you wonder if it really needs to be so intense. Thankfully, keeping track of your ISA is a lot simpler than whatever strategy they’re running. You can spread your annual ISA allowance (£20,000 for the current tax year) across all types of ISAs. In a stocks and shares ISA, you don’t have to use the full amount and you can add what you like, when you like. For some, a set amount every month works. Others like to feel the adrenaline rush of adding as much as they can at the end of the tax year. While the latter stresses me out to even write about, the good thing is they’ve started.
The account is the part of the equation that you have complete control over, make sure it’s the part you have a plan for too - including your investing schedule.
10. Progress beats perfection
The fear of getting an investment decision wrong puts a lot of people off even starting. That loss aversion is completely natural - it’s our hard-earned money, after all. Unlike bears or clowns, though, it’s not a particularly helpful fear. Even the best investors out there don’t have a 100% win rate - far from it - and there’s no reason to aim for absolute perfection. It’s why diversification, having a repeatable process to rely on, and a big dollop of humility are so important in investing.
It’s also why having a process in place for those shares that don’t quite work out is very much a healthy part of the journey. That could mean having a hard and fast rule of selling any share that dips by a certain percentage. Maybe you buy in stages so you benefit from a short-term price fall. Whatever strategy works for you, just don’t think that everyone else is perfect and you aren’t. Without a crystal ball, we’re all in the same boat.
Important information
When investing, your capital is at risk. The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you invest. Forecasts aren’t a reliable guide to future results or returns.
Make sure to do your own research on what investments are right for you before investing or consider seeking expert financial advice. Please note that this article is meant for information and does not constitute any financial advice. This is not an offer, recommendation, inducement or invitation to buy, sell, or hold any securities, or to engage in any investment activity or strategy.
Robinhood doesn’t provide tax advice. You should seek advice if you have any questions regarding the impact your investments will have on your income tax and tax filing requirements.