In this guide, we look at some top tips for making more money with an investment ISA including performance, contributions, fees, regular investing and what to buy.
There are two main ways to improve the performance of your Stocks & Shares ISA.
The first way is to invest in better underlying investments. This is easier said than done, however. No one knows how an investment will perform in the future and past performance is not an indicator of future performance. That said, if you have a managed ISA and it has consistently underperformed other managed ISA products in the past, it may be worth transferring the ISA to another provider.
The second way is to reduce fees. Over time, fees can have a large negative impact on investment returns. It’s important to ensure that the fees you are paying are reasonable.
Historically, shares have delivered excellent long-term returns for investors. Over the long run, UK shares have returned around 5% per year in real terms (i.e. above inflation) according to the Barclays Equity Gilt study. That compares to around 1.3% for UK government bonds and around 0.7% for cash. US shares have performed even better. Since 1926, the main US stock market index, the S&P 500, has returned about 10% per year.
It’s important to understand, however, that not every stock has performed this well. To obtain these kinds of returns from the stock market, you need to own a whole portfolio of shares. It’s also important to understand that shares do not rise in a straight line. In the short term, share prices move up and down. To generate good returns from shares, you generally need to invest for the long term.
When choosing shares to invest in, there are a number of things to consider including:
- The company’s growth prospects. Companies that grow substantially over time tend to be good investments.
- The company’s level of profitability. Companies that are highly profitable tend to be good investments over the long run. Companies that are not profitable are generally higher-risk from an investment point of view.
- The company’s balance sheet. Companies that have weak balance sheets tend to be higher-risk investments.
- The company’s dividend track record. Companies that consistently increase their dividend payouts tend to be good long-term investments.
- The company’s valuation. Companies that have very high valuations tend to be higher-risk investments.
It’s important to think about your financial goals and risk tolerance when choosing stocks for your ISA. If your risk tolerance is low, it’s sensible to invest in lower-risk, dividend-paying shares. If your risk tolerance is high, you may want to allocate some capital to higher-growth shares. It’s important to remember that, in investing, risk is directly related to return. The higher the potential return on offer, the higher the risk.
You can sell and rebuy shares in an ISA, normally without affecting your annual ISA allowance. However, you do need to check with your ISA provider to ensure that this is definitely the case.
- Further reading: How to buy shares.
Should I make regular ISA investments?
There are many different approaches to investment, but a popular method of reducing risk is to drip feed money into an ISA over the course of a year. This ensures that the investor is protected against drops in the value of the equities. For example, if £5,000 is invested in a fund in March and it drops in value by 20%, then the investor will be left with £4,000. A drip feeder would buy £2,500 in March, which would be worth £2,000 in April, and could then buy a further £2,500 at the lower price. This would leave the investor with £4,500 and a larger stake in the fund than the non-drip feeding example.
Investing within a Stocks & Shares ISA involves risk. However, there are a number of ways you can reduce the investment risk within your ISA.
One way is to invest in lower-risk investments. These kinds of investments are available on both managed and DIY ISA platforms. Wealthify, for example, offers a ‘Cautious’ plan. Meanwhile, Hargreaves Lansdown offers access to many lower-risk funds.
Another way to reduce investment risk is to diversify your portfolio so that it contains a mix of different assets. This will help reduce overall portfolio risk.
It’s worth noting that if your ISA provider is regulated by the FCA, you will be covered by the Financial Services Compensation Scheme (FSCS) if the provider fails (up to £85,000). The FSCS does not cover regular investment losses, however.
How can you track the performance of an investment ISA?
By logging into your ISA account you can view the performance of each underlying investment and the overall performance of your portfolio.
Providers offer charts showing how your portfolio has performed over time. This will include a mix of deposits you have made, as well as how your investments in the ISA have performed.
Here is an example of how Wealthify displays performance. You can see the regular contributions of £100, as the chart gaps up, followed by how the market has performed between jumps.
If you die, money and investments held within your Stocks & Shares ISA will be passed on to your beneficiaries.
After your death, your Stocks & Shares ISA will retain its tax benefits until one of the following things happens:
- The administration of your estate is completed
- The Stocks & Shares ISA is closed by your estate executor
If neither of these things happen within three years and one day of your death, your ISA provider will close your account.
In your will, you can leave your ISA to whoever you like. If you have a spouse or civil partner, they can inherit your ISA’s tax-free status as a one-off boost to their own ISA allowance.