What to do with your ISA allowance amidst market uncertainty
We are living in extraordinary times with heightened levels of anxiety as the deadly Coronavirus sweeps the globe. This uncertainty is being reflected in global stock markets, with indices such as the FTSE 100 and S&P 500 suffering extreme volatility.
While keeping healthy is the number one priority, people are also concerned about the longer-term financial impact of the pandemic.
Now that we are in the new tax year how should you respond? Is now the time to take advantage of market-sell offs or is it best to hold fire?
Unfortunately, there’s no simple answer. No-one knows how the coming months will pan out. Everything is being affected by this virus and economic growth is a write-off for the first half of the year at the very least.
‘No-one knows how the coming months will pan out’
Airlines, hotels, restaurants and retailers will suffer badly, while Italy is expected to suffer the largest economic hit. Elsewhere, the US has a track record of resolving issues and recovering strongly.
So what can an investor do, with new tax allowances to use, but uncertainty so rife?
One option if you have cash to spare in this environment is securing the ISA allowance, keeping that money initially uninvested but within the ISA ‘wrapper’, and then drip-feeding it into the market through regular investment to spread your risk.
By investing bit by bit you reduce the risk of further falls to your portfolio, benefitting from a phenomenon called ‘pound-cost averaging’.
The current situation is less about making speculative bets on potential winners, but judging carefully which investments have continued long-term value and potential.
A few golden investment rules always apply whenever you invest. The first is ‘time in the market’, as opposed to timing the market.
This means you need to focus on the long-term – a minimum of five years – as opposed to worrying about short-term fluctuations.
‘judging carefully which investments have continued long-term value and potential’
The second is of course diversification. Generally, different asset classes won’t rise and fall at the same time so having a broad spread provides you with an element of protection.
For example, when corporate bonds are offering meagre returns, you’d hope the equity proportion of your portfolio will be rising in value. It’s all about striking the right balance.
It means deciding the asset classes, countries and sectors to which you want exposure and then looking for the most suitable funds in those areas.
By investing across a range of these, you can limit your exposure to market setbacks in any one area.
Making such choices is a challenge even in rising markets. When the economic backdrop is so uncertain it can seem like mission impossible. While short, sharp falls happen such as recently, in the long-term markets do rise over time.
‘some asset classes and funds are oversold and undervalued’
As such, making new investments can pay off, especially when some asset classes and funds are oversold and undervalued. Investment trusts, for example, are currently trading at significant discounts across the market.
Square Mile, the independent fund researchers, have picked a number of portfolios that may be suitable for different types of investor on behalf of EQi.
For example, if you’re cautious and taking your first steps, then there are funds such as L&G Multi Index 4, which aims to generate capital growth and income, within a pre-determined risk profile.
More confident investors, who want a balanced portfolio, could consider Invesco Distribution, which aims to deliver income with the potential for future growth in income and capital.
Ultimately investing should not be a guessing game, or an attempt to bet when you’ll get the ‘best’ price for an asset. It is about building a portfolio of quality funds over time and letting it grow.
You can find more fund selections from Square Mile.
EQi is a DIY investing platform designed for individuals. It gives you access to global markets, control over your investments and offers customers award-winning support.