The seven deadly sins of ISA investing

Rachel Lacey reveals the investing sins that could be thwarting your investment growth.

Plenty of the seven sins could come between you and your investments. You might find yourself lusting after the performance of your neighbour’s ISA after they’ve swanned off for yet another holiday, or found that pride has stopped you selling a share that’s plummeting.

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But, as we enter ISA season, there are plenty more tangible ‘cardinal sins’ that can send your ISA – and your wider finances – off course.

1) Not making the most of your annual ISA allowance

Plenty of people can’t invest £20,000 into their ISA each year, but if you can afford to use your whole allowance, you’d be foolish not to.

Money held in ISAs grows tax free and there will be no tax to pay when you withdraw it either. So fail to use your ISA allowance and you could see yourself paying more income, dividend and capital gains tax than you need in the years to come.

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If you’ve got money tied up in shares or funds that aren’t in ISAs, you can’t transfer them. However, it’s possible to sell them and immediately rebuy them within a stocks and shares ISA in a process known as Bed and ISA. Just remember it will count towards your annual allowance.

If you’re already using your whole allowance, but spreading your money between cash and stocks and shares ISAs, it might be worth rethinking your strategy.

The personal savings allowance means basic-rate taxpayers can earn £1,000 in savings interest, while higher-rate taxpayers can earn £500 before they need to pay any income tax. Only additional rate taxpayers don’t get a personal savings allowance.

This means most people shouldn’t have to worry about paying tax on savings interest, so should arguably prioritise their ISA allowance for stocks and shares.

2) Glossing over fees

Whether it’s a fee you’re paying on your investment funds, or to run your investing platform, it’s important to check you’re getting good value for money. Percentage-based fees might look insignificant (1% isn’t much, right?) but when applied to a portfolio that could be worth tens or hundreds of thousands of pounds they can quickly rack up.

Charges can place a real drag on your returns. That means something as simple as switching your investments over to a better-value platform could make a real difference to your gains, without necessarily changing where your money is invested.

The same goes for funds and there may be opportunities to reduce your costs without taking a hit on performance. Actively managed funds can cost 1-1.5%. That’s all good if you’re achieving stellar returns, but with most of them failing to beat their index (96% of global equity funds and 70% of UK equity funds, according to S&P research), it might be worth considering cheaper index trackers.

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You can pay as little as 0.1% for a tracker. Performance that will only ever match the index might not sound very exciting, however, it could give you a huge saving if your expensive active fund isn’t faring any better.

3) Not investing regularly

Setting up a regular monthly payment into your ISA often works a lot better than ad hoc lump sums.

Lump sums carry the risk of significant losses if markets fall quickly after you invest and means there’s often also a temptation to really try and time the market. For many people that can be a real deterrent.

By investing regularly and drip-feeding your money into the markets, your risk is reduced by ‘pound cost averaging’ – this means you don’t buy all your shares when the price is up, or down, you buy at different prices each month, giving you an ‘average’ over time. And when you pick up shares when prices are down, you get more for your money and are better placed for gains when markets recover.

Another benefit of setting up regular investing is that you don’t have to make a conscious decision to invest each month. That removes any temptation to try and time the market – a strategy not even the professionals consistently get right.

4) Being too cautious

Just as being greedy can wreak havoc with your investments, so too can being too cautious. The damage caused by so-called reckless caution might not be so dramatic – in so far as you might not lose any money – but by not taking enough risk you may not make any either, which can be just as detrimental to your nest egg. It might mean you aren’t able to retire on a comfortable income or enjoy the lifestyle you want.

Successful investing is all about finding the middle ground and taking a calculated risk.

The value of money invested in equities will always rise and fall, but over the long term, it should grow faster than cash. The key is not to invest any money you might need imminently and give yourself an investment horizon of at least five to 10 years. 

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How much risk you take is a very personal decision, but there are plenty of ways to control investment risk, including diversifying your money across a range of investments and asset types. It’s also worth bearing in mind, that the longer you have before you’ll need the money, the more risk you can afford to take, particularly in the early years of your investment.

5) Not keeping any money in cash

While holding too much money in cash is the classic trait of reckless caution, it’s important to hold some in an instant access savings account. Experts typically recommend in the region of three to six months’ expenses. This means that if there’s an emergency or unexpected expense, money is at hand, meaning you don’t need to risk cashing in investments at the wrong time.

6) Putting all your money on one horse

Your chances of enjoying good – and consistent – returns are increased if you diversify your investments, or spread your bets. You can do this by investing in a range of assets and ensuring that equity-based investments cover a broad range of countries and sectors. This means that if one holding suffers, it doesn’t necessarily bring the rest of your portfolio down with it.

It's much easier to get a good level of diversification by investing in funds rather than shares. And, you don’t necessarily need lots of funds either – some ‘one-stop shop’ funds are designed with diversification in mind.

7) Being too emotional

The decision to invest and how much risk you take are all very personal decisions. But it’s important not to let your heart rule your head – allowing emotions to enter the decision-making process will often do more harm than good. Greed, for example, can make you reckless in taking too big a gamble with your investments, or make you vulnerable to scams. Fear can have the opposite effect, making you panic and sell investments when markets wobble, when you should be holding your nerve.

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Your investments are much more likely to be successful when you stick to the golden rules – investing regularly into a diversified portfolio and leaving your returns to compound over a long period of time. Don’t let rash or impetuous decisions interrupt that process.