Some of the personal finance writers in the national newspapers have been knocking ISAs recently. Ignore them. Lots of personal finance journalists are young people with families and no money, so they don’t really appreciate the value of good investments - but they do write about them.
It is true that if you invest in shares, the tax breaks for ISAs are modest - provided you only pay standard rate tax. But if you pay higher rate, or invest in fixed interest, the tax breaks are very valuable. Details.
http://www.everyinvestor.co.uk/bbuys_editorials/isa_keyfacts.asp
Also, as an investor, you have to take a long-term view. I personally am assuming that the ISA tax break will be extended beyond 2009 when it expires under current legislation. Whatever government we have needs to encourage savings - despite its rhetoric, Labour has signally failed to achieve this - and clobbering ISAs would be pretty dumb politics as well as daft economics. The facts about ISAs.
http://www.everyinvestor.co.uk/bbuys_editorials/isa_keyfacts.asp
The stock market is right for the long term
Most of us do have long-term financial objectives. It may be helping children through college, or boosting income in retirement. But whatever the objective, if the timescale is over ten years, a significant part of the savings or lump sums you allocate to it should be invested in the stock market. The government itself acknowledged as much when it agreed that the standard option for the Child Trust Fund could be an index-tracking stock market fund.
Most people are still swayed by the recent poor performance of the FTSE 100 Index, which is still well below its 2000 high. But how many people know that the FTSE 250 Index is at an all-time high? Shares in medium sized and smaller companies have boomed in the past two years, for the very good reasons that these companies are rapidly increasing sales, profits and dividends to shareholders.
Over the long term, in a capitalist economy, profits should grow at least in line with the rate of growth in the economy as a whole - and that should be faster than the rate of inflation. So shares are one of the few assets that do offer scope for real growth in value - growth in the spending power of the money saved or invested.
Of course, over any short period shares prices will go up and down: most of these short-term movements are largely random and hard to predict, which is why day-trading in shares is as likely to bankrupt you as make you a millionaire.
How to decide which is the right type of ISA for you
So if you are saving or investing for the long term, use your annual ISA allowance to minimise tax. Next question: which type of ISA? It depends on how much you have, and what your aims are.
http://www.everyinvestor.co.uk/bbuys_editorials/isa_keyfacts.asp
Type of ISASuitable for
Fund manager - unit trust or investment trustRegular savings. Best to choose large, widely spread fund.
Stockbroker self-selectLump sums. Must have the confidence to pick your own shares.
Supermarket self-selectLump sums and regular savings. Select your own funds - pay lower initial charges than if you buy direct from the managers
Supermarket ‘package’Can contain good funds, but do not treat these as ‘buy and forget’ - you will need to review and change
I’m not a great fan of fund manager plans, because the average tenure of an individual fund manager is now under 3 years. If you have an ISA with a fund manager, you can usually switch between their own funds, but if you want to switch to a fund managed by a different group it can be costly and is certainly a hassle.
However, a few regular savings schemes from investment trust managers are good value and offer access to other funds, such as Alliance Trust. There’s a complete list here.
http://www.itsonline.co.uk/find_compare/azlistsearch/group_results.asp?view=s
Charges are the key issue with stockbroker self-select plans. Watch out for annual fees and charges on top of sharedealing costs. Good value are comdirect (flat £25 a year, £12.50 per trade), Halifax (small admin fee, £11.95 per trade), Selftrade (charge of £9 per quarter if no trade, deals £12.50 each), Share Centre (about £20 a year, deals at 1% or £7.50).
A really low-cost way to invest in shares is through comdirect’s i-plan, where you can invest in Exchange Traded Funds in the UK, US, Europe and Japan at no charge. This is exceptional value for money.
For DIY fund selection, Hargreaves Lansdown’s Vantage plan offers the widest choice of funds, while Fidelity’s self-select ISA offers more guided help in creating your own portfolio.
https://www.hargreaveslansdown.co.uk/siteredesign/hlvantage/intro.asp
http://www.fidelity.co.uk/direct/index.htmlr
Which funds in your ISA?
For the long term, my favourite type of fund is UK Equity Income funds. In my view everyone should have some of these funds in their ISA. Regard them as ‘core’ holdings and then add more growth-oriented funds- like Japan funds, which I’m keen on at the moment- where you should expect to switch when you’ve made a good profit.
http://www.everyinvestor.co.uk/bestbuys/bestbuys_uk_equity_income.asp
[LINK TO JAPAN FUNDS ARTICLE]
Equity Income funds outpace the trackers
UK Equity Income funds are the single most reliable type of fund in the UK. Because they invest to get higher dividends, they secure a chunk of return for investors up front, unlike growth-oriented funds, which try to get all their returns in the form of capital growth. I’ve made the point before that dividends account for over half the overall returns from UK shares over the past 100 years. Funds that focus on dividends give you a head start.
Not only that, they impose a rigorous discipline. A typical equity income fund aims to give investors a starting yield of 10% more than the All Share Index. That means that if a fund owns shares that shoot up in price, so that their yield falls, the manager simply has to sell them and find higher-yielding shares, so that incoming investors to the fund still get the same initial yield.
How Equity Income funds have beaten trackers
Percentage returnsCalendar years
5 years to 03/02/042004200320022001
UK Index Tracker -9.0% +11.1%+18.8%-23.2%-13.7%
UK All Companies-2.3% +12.0%+22.6%-22.9%-13.1%
UK Equity Income +30.0% +16.2%+21.0%-17.0%-5.9%
Our Equity Income fund selections
The recent record is impressive - and this is the average fund. Our own fund selections have, on average, done even better. The pundits agree with me - these funds should be a core holding for all investors, one you hold for the very long term, changing it only if you have good reason to do so.
