My first four years as an ISA investor

Scared to start investing? Here’s my personal experience, from opening a stocks and shares ISA to facing the pandemic and making big decisions that affect my money.

Opening a stocks and shares ISA

Confession: I’m pretty sure that I only have a stocks and shares ISA because I started working at a magazine in my mid-30s dedicated to shares, funds, pensions, and other money matters. As I learned about ‘investing’, a world that I had perceived as dismal grey, incrementally became technicolour, and I realised that it made good sense for me to enter this investing Oz. Better still, I didn’t need the huge sums of money I had imagined were a pre-requisite for investing.

If you are thinking about investing your savings - perhaps it’s one of your goals for 2023? - my experiences might help you take the plunge and get started.

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Continuing the Wizard of Oz analogy, I realised that at the start of my investing journey, I was a bit like the Scarecrow, I needed a full quota of investing brains before I could dive in. So, I read a lot of beginner-level articles to make sure I understood the basics (What is a stocks and shares ISA? What would it cost me in fees? What is a fund?). That reading gave me confidence, and soon I was ready to undertake the Great Switcheroo and give my cash ISA the heave-ho for a stocks and shares version.

I wanted a low-cost, low-maintenance investment, and I now understood that regular investing helps smooth out the ups and downs of the stock market. This is because you buy units of your chosen investment fund at a low price when markets are in the doldrums, and at a higher price when markets are bullish. This ‘pound-cost averaging’, as it is known in industry-speak, means that the level at which you invest in the market averages out over time.

I also learned that diversification is essential, and that risk is inescapable, but that you can make an informed decision about how much risk you take on. It is rare for someone to lose all their life savings (a widespread fear) if they hold a truly diversified investment. Risk is comparable to spicy food; it’s all about how much you can stomach, and you get to choose whether you invest cautiously or adventurously depending on your temperament, age and goals.

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In April 2019, I chose one low-cost, globally diversified, multi-asset fund with auto-rebalancing, and put it into my newly opened stocks and shares ISA, so I could start drip-feeding money in each month via a direct debit.

I opted for the Vanguard LifeStrategy 80% Equity fund, which appears on interactive investor’s list of Quick-start funds. These funds “offer a simple starting point for investing” and are “low-cost [options] that have been specially selected by experts”.

My regular monthly investing plan was going smoothly, and then, about a year later, Covid happened…

Quadruple shock: Covid, war, inflation, and a KamiKwasi budget

In February 2020, my fund, along with global stock markets, crashed as a new virus spread around the world. I chose not to look at my ISA and I tried to channel the words of actor Mark Rylance. There’s a catchphrase his character in the Cold War film Bridge of Spies (2015)trots out when asked if he’s worrying. Without fail, Rylance responds with: “Would it help?” It is sound advice! I averted both my thoughts and my gaze from my ISA because I knew it wouldn’t help to look at the balance in the wake of the pandemic.

The Covid market sell-off began on 21 Feb 2020 (the virus was now spreading more widely) and the market bottomed on 23 March (the date the first UK lockdown was announced by Boris Johnson). Today, after looking at the historical data, I can tell you that the fund in my ISA fell -17.3%, from peak to trough.

But I was extremely fortunate. I wasn’t about to retire, so I didn’t need to call on my savings right then, and I didn’t have an immediate need for that money, because I was lucky enough to hold on to my job and wait for Boris Johnson’s heralded scientific calvary to deliver the vaccines. I was what some media commentators called a ‘pandemic winner’, and I was very grateful for that.

I just needed to wait for the market to recover – and it did. By 5 November 2020, my fund had recovered its losses. If I had pulled my money out on 23 March, there would have been no way for my investment portfolio to recover. I didn’t pause regular investing during the pandemic. Keeping up with monthly investing meant that I was buying units of my fund at a much cheaper price.

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Aside from so-called Black Swan events such as Covid – events that no one could ever predict with great certainty - other market dips during the time I have held my ISA have included Putin’s war in Ukraine, and the September 2022 mini-budget omnishambles by Liz Truss and Kwasi Kwarteng.

Last year was a difficult one for investors. A lot of the performance of my fund during 2022 was influenced by the ‘uncoupling’ of bonds and shares – the two assets that my Vanguard LifeStrategy fund is made up of.

Normally with a multi-asset fund, the bonds part is seen as the ‘safer’ element, and when shares fall, bonds rise, so there is some protection. But in 2022 shares and bonds both fell.

The unusual decoupling of bonds and equities was caused by interest rate rises, which made bond prices fall. Rising interest rates are an attempt by central banks, such as the Bank of England, to curb high inflation. And the red-hot inflation we all are feeling now in higher food and energy costs is in part owing to the war in Ukraine.

But it is likely that the usual correlation between stocks and bonds will recover once central banks stop raising interest rates. Like the Cowardly Lion in The Wizard of Oz, have courage that the market – and your investments - will recover.

Investment regrets?

I have none. From the day I opened my ISA (1 April 2019) to date (18 January 2023), my fund has returned 25.4%. It’s roughly a 6% return a year if you think about it annually. Not bad if you consider all the terrible events in that time.

In comparison, the current best rate for an easy-access cash ISA, according to Martin Lewis’ moneysupermarket.com, is 2.75%.

I started investing late (in my mid-30s), and I’m glad I got started with a stocks and shares ISA. Directing your own financial future, unless you pay a financial adviser, is a necessity for most millennial geriatrics like me, and the tax-free ISA wrapper is an essential element of most people’s financial planning for the long term.

A five-year plan: what next?

Conventional investing wisdom suggests that you should hold a fund such as mine for five years minimum to enjoy a decent return, given the normal ups and downs of the stock market.

I’ve got just over a year until the fifth-year anniversary, but I doubt I will stop being a passive investor in an index fund.

Why am I not considering active funds? The precious commodity that is time means that I enjoy the ‘set and forget’ aspect a passive fund offers me. The fund I invest in auto-rebalances, meaning I don’t have to pay it constant attention amid the demands of life, and the simplicity of the fund’s construction means I’m certain how it works.

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Also, I am not fully convinced that I want to pay a premium in the form of a higher fee for active management for the chance of outperformance (where a fund beats its benchmark - the yardstick for measuring performance). I am not denying the decades of knowledge that fund managers typically have, and I understand that many have a team of analysts and researchers informing their stock-picking choices. But I would rather stick with the low charges of a passive investment, and the returns I have enjoyed so far satisfy me. Although I reserve the right to change my mind!

I chose a Vanguard multi-asset fund, but BlackRock, and Fidelity, for example, also offer this type of fund. There isn’t a ‘right’ answer for the fund provider. However, the fact that interactive investor, the UK’s second-largest investment platform for private investors, includes my fund among its Quick-start funds for beginners, is certainly an endorsement.