Whether you are overhauling existing savings or starting afresh, these tips will make your Isas more efficient and profitable
Gearing up to invest afresh in the new tax year? Or thinking of overhauling your existing portfolio to ensure it remains up to scratch?
Either way Telegraph Money , with help from a selection of financial advisers, fund buyers and other investment experts, has pulled together 21 tips to help savers make the most of their Isa investments and avoid the costliest pitfalls.
1. Learn from the real gurus
Learn from history’s greatest investors the likes of Warren Buffett, Benjamin Graham and Peter Lynch. Peter Lynch’s Beating the Street and One up on Wall Street remain among the most acclaimed books for private investors, as does Ben Graham’s The Intelligent Investor . And thousands swear by Warren Buffet’s annual letters to the shareholders in Berkshire Hathaway (Sao Paolo: BERK34.SA - news) , the investment company he chairs all of which can be read online at berkshirehathaway.com , going back to the late Seventies. Read more: The easy way to invest like the gurus
2. Be reasonable about risk
The possibility of losing any money is off-putting for some. But over longer periods this caution can prove costly. This is certainty the case with parents who invest on behalf of their children in a Junior Isa. In the last tax year three in four of the 100,000 accounts opened chose to invest in cash as opposed to stocks and shares. Stock markets can of course fall in value, but an eighteen year period gives parents plenty of time to ride out the peaks and troughs. Analysis of investment returns since 1900 shows the average “bear market” when shares falls steeply takes eight years. That covers the period from peak to trough and back to the original peak.
3. Sell your winners and rebalance
When certain investments have performed well they will represent a larger proportion of your Isa. But the downside is this can leave your Isa too exposed to a particular investment. This can also increase risk.
To avoid this, Patrick Connolly, of adviser Chase de Vere, said it is safer to bank your profits and plough the proceeds into areas that offer better value. “This may sound counter-intuitive but it means you will be selling at the top of the market and buying at the bottom, which is what investors should ideally do,” Mr Connolly said.
It is best to steer clear of trying to predict the peaks and troughs of the stock market. This can be difficult to resist, particularly in an age where investors are overloaded with information about the latest hot trends.
Research from Fidelity Personal Investing, the fund shop, found that someone who invested £10,000 in the FTSE All Share 20 years ago but missed the best 10 days in the market would have achieved an annualised return of 4.8pc and ended up with £20,568.
Those who stayed invested the whole time would have made 8.1pc and would today have seen their investments grow to £40,747.
5. Don’t just pay bills by direct debit invest this way too
Spreading your Isa investment into monthly payments evens out stock market movements and reduces the risk of an investor buying into the market at the wrong time.
The strategy is known as “pound cost averaging”. When stock markets fall regular savings buy more shares or fund units. Conversely, when stock markets rise, fewer shares and fund units are purchased.
6. Re-invest your dividends unless you need the income
Following this golden rule will make a big difference to the growth of your investments over the longer term as the effect of compounding works its magic. Analysis by FE Trustnet at the end of last year found an investor who 20 years ago put a lump sum of £10,000 into the Invesco Perpetual High Income fund would have gained an extra £27,000 if the dividends were reinvested: his total return would have been £92,000, compared the dividend-take’s £65,000. Remember to buy the accumulation (“acc”) share class , which reinvests the income generated by the fund manager back into the fund.
7. Buy different assets but don’t buy too many funds
The old saw don’t put all eggs in one basket holds true with investing. But do not clutter your portfolio with too many different funds. This not only increases costs, but can also cancel out the gains made by the best performing funds. Ben Yearsley, of Charles Stanley Direct, the broker, suggests that each fund should make up between 5pc or 10c of an Isa, to allow each fund to make a meaningful contribution.
8. Feeling contrarian? Buy an investment trust on a discount
Some of the most famous investors made their names betting against the crowd, and one way to do this is invest in out-of-favour investment trusts. Here, the share prices lag the value of underlying assets - creating a “discount”. Lee Robertson, the head of Investment Quorum, a wealth manager, said investors will net bigger returns if sentiment turns because they will have picked up a bargain price.
9. If you don’t want to be let down by a fund manager, buy a tracker fund
Those who do not have the time to select a fund manager or who don’t believe it is possible for individuals to beat the market consistently over time should just by a tracker fund, which aim to mirror the performance of a particular stock market.
The majority of fund managers fail to beat the market year after year, so it is crucial to do your homework to avoid a dud.
10. Don’t just buy familiar funds
Some of the best performing fund managers work for “boutique” firms that spend little or nothing on advertising, rarely crossing investors’ radar. Aberforth UK Small Companies and the Chelverton UK Equity Income fund are two top-performing funds that are often overlooked in favour of the big brand names.
11. View fund tip lists with a pinch of salt
Most big fund shops or brokers have a list of “favourite” funds, which are essentially tips.
But these lists should be the starting point when researching funds, rather than being used in isolation. They are not necessarily the best fund options for you.
12. Do not follow the herd
Investors may rush their decision-making as the “Isa season” deadline of April 5 nears. Popular (NasdaqGS: BPOP - news) funds that top the performance charts are chosen as investors race to make the most of their allowance (£15,000 for 2014-15 tax year). Whether these funds will keep up their form is anyone’s guess, but investors risk buying into a theme late in the game. Instead look for good-value investments that others are overlooking.
13. Avoid fad investments
Be wary of funds that claim to be offering something new or different. These funds are often dreamt up by sales and marketing teams to tap into a big trend. For instance over the past decade a raft of climate change funds were launched by big fund firms. Jason Hollands of Bestinvest, the broker, warned investors to steer clear. “Unfortunately too many of these fad funds are designed with a persuasive narrative that gets some investors excited. But these funds often fail and offer poor value.”
14 . Invest for at least 5 years
Financial advisers view five years as a minimum. For the more riskier fund options, such as funds that buy emerging market shares, 10 years is seen as a more sensible time frame.
15. Do not ignore small-sized shares
It may feel more safe backing a familiar name in the FTSE 100, such as Vodafone or BP. But over time it is the shares outside London’s main index that tend to produce superior performance. There are plenty of gems to be found for those who are willing to do some research. Over the past 10 years for instance the FTSE 250 has returned 137pc while the FTSE 100 index is up by 39pc.
16. Valuation measures are your friend
Learn how to assess whether shares on a particular stock market are cheap or expensive.
17. Do not be lured by high yields
Shares (Berlin: DI6.BE - news) offering high dividend yields (calculated as a ration of the share price to the dividends) are eye-catching, but make sure you check that dividends are sustainable. A high yield can signal the share is a “value trap” and could soon take a knife to its dividend payments. Read more: Five doubtful dividend stocks and the Isa funds avoiding them.
18. History does repeat itself and some adages appear to be true
Certain stock market trends and patterns play out regularly. These include the adage “sell in May and go away”. Another is that certain shares perform better during the winter months; the Chinese stock market grows most in the secon half of each year, and the gold price tends to rise in September. Read more: Tips and tricks to play stock market trends
19. Don’t invest in something you do not understand
From complicated with-profits (Equitable Life) to risky, leveraged investment funds (split capital investment trusts), many complex schemes end in tears. Only invest in something you can readily understand.
Some professional investors, for example, refused to own bank shares in the run-up to the crisis, precisely because they found banks’ cross-ownership of debt too opaque to understand.
20. Keep your costs to a minimum
The aim of every investor should be to cut their costs to the absolute minimum. Pick your broker carefully, as they also levy a separate charge. Telegraph Money’s colour-coded tables identify the cheapest fund shop for the amount you want to invest.
21. Do not give up
The key is not to make the same mistake twice and keep an open mind.
Mistakes are part of the learning process and will make you a more successful investor in the future.