If you’re having trouble deciding what to invest in your ISA before the deadline hits, this guide looks at ISA investing ideas across five asset classes and highlight some of the best investments in each one so you can build a diverse ISA portfolio.
Each year ISA investors get the opportunity to add to their tax-free portfolios, but it’s not just a case of squirrelling away up to £20,000 in a tax-free wrapper, because there is also the small matter of how to make that money work efficiently for you, within the ISA.
Deciding how to allocate your ISA allowance, and into what asset classes, indices, sectors and individual stocks, is not an easy task. It’s one that’s not been made any easier by inflation, and thanks to higher interest rates, plus the return of cash (in cash ISAs) is a viable alternative to risk assets.
Thankfully, there are some experts out there who have come up with some good ideas to get you started. Here we take a look at the best investments for your ISA account.
1. Shares
Stock and share ISAs have become increasingly popular with self-determined investors. That’s not so surprising when you consider that over the last five years, an investment into SPY, the S&P 500 tracker, has returned in excess of +107%, whilst chip maker Nvidia has delivered a +1,900% return to shareholders in that time.
Risk and reward are intimately linked, of course, and trying to balance the two is another part of the investing jigsaw. The good news for ISA investors, who are often saving for the longer term, is that time in the market is definitely on your side.
Research by Bank of America found that the longer you are invested in the stock market, the less likely you are to suffer negative returns. Looking at data back to 1929 the bank found that if you stay in the market for ten years then, on average, you have just a 6.0% chance of negative returns. Compared to a 26.0% chance if you keep your money invested in stocks for just one year.
One way to find the best shares to invest in is to look at what ISA investors at the UK’s largest stockbroker, Hargreaves Lansdown, are doing, the 5 most popular stocks bought on HL over the last week have been:
- Airbus – Long runway Ahead
- AstraZeneca – Transformational treatment of disease
- London Stock Exchange – Bridging the gap
- Nvidia – More growth to come
- Unilever – Streamlining a beast
Derren Nathan, head of equity research, Hargreaves Lansdown, said that “The London Stock Exchange Group (LSEG) is now predominantly a data and analytics business. Efforts to drive profitability could see it bridge the valuation gap with some of its US peers if it can deliver results over the next few years. Regulatory challenges are ever-present but trends such as the electronification of trading, and the adoption of technology through its partnership with Microsoft means there’s plenty of growth to go for.”
2. Bonds
Bonds are effectively government or corporate IOUs, they have been safe haven and an important source of income for investors for decades.
However, recent gyrations in bond markets have left investors with tough choices.
During covid, bond yields fell to zero or lower, however, since then bond prices have fallen and yields have risen, as interest rates rose to counter inflation.
However, the sharp fall in bond prices does mean that investors can now find quality bonds below par, (or their redemption price), once again.
Of course, its not just government bonds that offer attractive yields; Corporate bonds can do too.
However, the issue for most ISA investors is that many corporate bonds are not denominated in retail tranches. Instead, they often come in £100,000 or $100,000 clips, which puts them beyond the reach of many ISA holders.
Thankfully, there are what are known as retail bonds, which are typically structured in units of £1000.00 and which were introduced specifically to appeal to retail investors.
These bonds have been issued by names such as BT Group, Legal and General, HSBC Glaxo Smithkline, Wessex Water, Lloyds Bank and others.
- Want to buy bonds? Compare the best bond brokers here.
3. ETFs
ETFs or Exchange Traded Funds have become one the most popular asset classes among investors. Not every ETF is ISA eligible, however.
For example, US-listed ETFs, which don’t produce Key Information Documents, or KIIDs, are off limits to UK retail investors, luckily, the are still plenty of eligible ETFs to choose from.
InvestEngine is an excellent choice for buying UK listed ETFs as their ISA is completely free. Or you can use their managed service for only 0.25% to invest in a portfolio of ETFs.
If you want to buy them yourself, Interactive Investor produces a monthly list of the most purchased ETFs among its ISA and SIPP investors. Which, in September, included sterling-based S&P 500 tracker funds, FTSE 100 tracker funds, and an all-word equity fund among others.
The top ten ETFs bought on Interactive Investor in last year were:
- Vanguard S&P 500 UCITS ETF GBP (LSE:VUSA)
- Vanguard S&P 500 ETF USD Acc GBP (LSE:VUAG)
- iShares Core MSCI World ETF USD Acc GBP (LSE:SWDA)
- Invesco EQQQ NASDAQ-100 ETF GBP (LSE:EQQQ)
- iShares Physical Gold ETC GBP (LSE:SGLN)
- iShares Core FTSE 100 ETF GBP Dist (LSE:ISF)
- Vanguard FTSE All-World UCITS ETF GBP (LSE:VWRL)
- Vanguard FTSE All-World ETF USD Acc GBP (LSE:VWRP)
- iShares S&P 500 Info Tech Sect ETF$Acc GBP (LSE:IITU)
4. Funds
Managed funds have taken a bit of a back seat in recent years thanks to the growth in and rising popularity of ETFs. However, there is still quite a healthy fund sector out there. Fund specialists Trustnet lists 628 managed funds in its UK databases, and just over 4500 funds when taking into account other geographies.
Kate Marshall, lead investment analyst at Hargreaves Lansdown has highlighted these three funds to make the most of this year’s ISA allowance.
Troy Trojan
Total return funds are more conservative than funds that invest fully in company shares. They normally invest in a mix of investments including shares, bonds, commodities and currencies. They could help provide modest growth for an investment portfolio over the long term, and help shelter money when stock markets fall, but are unlikely to keep up with stock markets when they rise quickly.
This fund invests in a mix of inflation-linked bonds, gold, currencies and shares, which includes some of the world’s best-known companies with highly recognisable brands.
HL think the fund could form the foundation of a broad investment portfolio, has the potential to bring some stability to a more adventurous portfolio, or provide some long-term growth potential to a more conservative portfolio.
Legal & General Future World ESG Tilted and Optimised Developed Index
Global equity funds provide a good foundation to an investment portfolio focused on long-term growth. Investing in companies across the globe provides a good level of diversification in a single fund. This one provides broad exposure to a range of large and medium-sized companies in developed markets, such as the US, Japan and Europe, while being mindful of environmental, social and governance (ESG) issues. Responsible investment funds give you the chance to make money in a way that’s in line with your principles.
This fund aims to track the performance of the Solactive L&G ESG Developed Markets Index. It won’t invest in tobacco companies, pure coal producers, manufacturers of armaments or persistent violators of the UN Global Compact Principles.
An index tracker fund is one of the simplest ways to invest, and this one could be a good addition to a broader investment portfolio aiming to deliver long-term growth in a responsible way.
FSSA Asia Focus
Over the years, rapid industrialisation, growing populations, and a desire to succeed have helped transform countries in the Asia region. Domestic consumption is set to be a key driver of growth over the coming years, helped by a young and growing population, and rising wealth. Continued innovation from companies at the forefront of technology based there could also provide exciting growth opportunities for investors. However, younger economies mean the risks are greater and more volatility should be expected. While Asia is home to developed markets such as Hong Kong and Singapore, others, including China and India, are still emerging so a long investment horizon is essential to help ride out the ups and downs.
This fund is run by a manager and team with a great pedigree of investing in Asia. It could provide long-term exposure to the Asian market as part of a globally diversified investment portfolio.”
5. Investment Trusts
Unlike managed funds and ETFs, investment trusts are closed-end funds. That is the number of shares or units in the trust is fixed rather than floating. The share price of the investment trusts reflects the performance of the managers and the valuation of the assets that the investment trust owns and the supply and demand or fund flows into and out of the trust.
Trustnet lists 278 UK investment trusts in its database, and they are a varied cross-section of asset classes and management styles. Spanning equities, property, mixed assets, hedging, commodities/energy and money markets.
A popular way to look at investment trusts is to consider the discount of the NAV or net asset value of a trust, relative to its underlying share price of the trust. The thinking here is that a wide discount to net assets should narrow over time and that by buying assets at a discount you may get your hands on a bargain.
Of course, there may well be very valid reasons why an investment trust trades at a substantial discount to NAV.
When we pick ISA investments, we are usually investing for the long term and choosing assets to perform well over five, ten, and fifteen-year time horizons is a very different skill to timing stocks and other assets for short-term trading, Investing over the longer term can provide us with the opportunity to diversify.
However at the same time to focus on particular investment styles such as growth or income, and to have a good look at how much risk we want in our portfolios. Often that judgment is determined by our age and here are in our investment journey, the younger you are the more risk you can afford to take on. If you are older you may be more interested in investing for income.
Richard is the founder of the Good Money Guide (formerly Good Broker Guide), one of the original investment comparison sites established in 2015. With a career spanning two decades as a broker, he brings extensive expertise and knowledge to the financial landscape.
Having worked as a broker at Investors Intelligence and a multi-asset derivatives broker at MF Global (Man Financial), Richard has acquired substantial experience in the industry. His career began as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson), following internships on the NYMEX oil trading floor in New York and London IPE in 2001 and 2000.
Richard’s contributions and expertise have been recognized by respected publications such as The Sunday Times, BusinessInsider, Yahoo Finance, BusinessNews.org.uk, Master Investor, Wealth Briefing, iNews, and The FT, among many others.
Under Richard’s leadership, the Good Money Guide has evolved into a valuable destination for comprehensive information and expert guidance, specialising in trading, investment, and currency exchange. His commitment to delivering high-quality insights has solidified the Good Money Guide’s standing as a well-respected resource for both customers and industry colleagues.
You can contact Richard at richard@goodmoneyguide.com
