Perfecting your ISA portfolio
ISAs give individuals the chance to invest in a range of assets. But it’s important to consider your appetite for risk before selecting any investments – by JP Morgan Asset Management
Another year rolls by and again the ‘ISA season’ draws nearer, the start of a new tax year and the chance to open a new Individual Savings Account. Launched in April 1999, ISAs have proved resoundingly popular with millions of investors. But every investor is different, so what principles lie behind assembling the right ISA portfolio for you?
Just a few months short of its 19th birthday, the Individual Savings Account (ISA) reigns supreme as the favoured way for millions of people to get access to the stock market.
That is hardly surprising when you consider the tax breaks available to ISA holders. Money is paid in out of taxed income (in contrast to pension contributions) but, in the words of the Government’s own website: “With a stocks and shares ISA… you don’t pay tax on any income or capital gains from your investment.”1
During the current year, £20,000 can be invested in an ISA. As for what emerges in terms of investment returns, the sky is the limit, with no cap on the amount that can be earned free of tax.
For the stocks and shares ISA investor, then, the critical factor on which returns will depend will be the selection of investment assets. This, in turn, will reflect each individual investor’s appetite for risk.
Some risk is unavoidable – an investment is unlike a bank deposit in that there is no guarantee your money will be paid back to you. By way of compensation for this, those investments that do well ought to pay significantly more than the interest available on deposit accounts.
So there will be risk, but how much is up to you. It is a truism that higher risk tends to be equated with higher potential rewards – were it otherwise, there would be few takers for the riskier investments. But that is of less importance than the need for each investor to be happy with the level of risk in their portfolio.
Weighing up risk
In general, someone investing for the long haul can probably afford to take more risks than someone with a shorter time horizon. That is because asset values, especially those of equities, tend to rise over time, thus the portfolio ought eventually to “come right”.
For the low-risk investor, the traditional backbone of their portfolio has been bonds, whether government paper such as British gilt-edged stock or investment grade corporate bonds. The coupons that they pay are set in advance (hence the phrase “fixed income”) and the likelihood of default– for instance of a British gilt-edged stock – is remote. Predictability is everything, although of course the market value of the bonds can rise and fall.
Sitting alongside these bonds may be some exposure to equities in blue-chip companies at home or in the eurozone and the US.
At the opposite end of the spectrum would be a high-risk portfolio, assembled by investors with a much greater risk appetite. Looking round, it is clear that those seeking a more adventurous investment strategy are spoilt for choice.
They can look to emerging market investments, riding the ups and downs of those economies seen as having the potential for future success. Or they may prefer to back smaller companies at home, those with more potential for growth – and for failure.
The more experienced investor may seek out commodity producers such as natural resources. Or they may prefer convertible bonds that can be exchanged for equity at a future date.
Somewhere in the middle is the medium-risk portfolio, a blend of the two approaches that would have a broader balance between bonds and equities and would meet the needs of those who wish to mix riskier elements of their portfolio with less volatile investments.
Investment trusts are one type of investment vehicle which are available through a stocks and shares ISA. Our investment trust range offers access to a range of markets and business sectors-to find out more about our investment trust offering click here .
The need to review risk
ISAs offer a tax-efficient way for ordinary investors to put their wealth to work in the share and bond markets. But a thorough appraisal of each investor’s attitude to risk is an essential first step in creating a portfolio that suits them.
1 Source: Gov.UK
This is a promotional document and as such the views contained herein are not to be taken as an advice or recommendation to buy or sell any investment or interest thereto. Reliance upon information in this material is at the sole discretion of the reader. Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. The results of such research are being made available as additional information and do not necessarily reflect the views of J.P. Morgan Asset Management. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are unless otherwise stated, J.P. Morgan Asset Management’s own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you.
It should be noted that the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Changes in exchange rates may have an adverse effect on the value, price or income of the product(s) or underlying overseas investments. Both past performance and yield may not be a reliable guide to current and future performance. There is no guarantee that any forecast made will come to pass. Furthermore, whilst it is the intention to achieve the investment objective of the investment product(s), there can be no assurance that those objectives will be met.
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