Simple Guide To Investing In Isa Stocks And Shares

By Author: Malcolm Anderson
Total Articles: 6
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In a nutshell, an ISA (which stands for Individual Savings Account) is a savings vehicle for your investments that gives you an annual tax-free allowance. My previous article titled 'Essential Guide to Understanding ISA's in 2011' explained in easy terms exactly what ISA's involve and outlined their main benefits.



Stocks and Shares ISA's are riskier and more complicated than Cash ISA's. Although they can deliver higher returns on your investments, they carry no guarantee of this.



The following guide will look at how you can go about investing in Stocks and Shares ISA’s so that you know how to avoid their main pitfalls.



Hedging Your Risk


When it comes to investing your money, the first rule is not to put all your eggs in one basket. In other words, if all your cash is invested in just one fund for many years, it runs a much higher risk of falling in value due to unforeseen global market events. These downfalls can include weak performance in the stock market index, a collapse in the companies or lack of growth in the part of ...
... the world in where your investment lies and a poor investing strategy from your fund manager.



If you’ve never gone the ISA route, it’s a good idea to start with a Cash ISA first before you spread your wings on the UK stock market.



When it comes to a Stocks and Shares ISA's, what you want to do is grow a portfolio over time, gradually adding to it to in a way that suits your long-term financial goals. You're also strongly advised to start with safe funds, then when you get the hang of things you'll be better placed to take riskier investments. Examples of a good place to start would be a FTSE tracker fund or UK equity income fund, which would involve companies you already know and have confidence in.



Other safe bets include a UK corporate bond fund which allows for your cash to invests in the debt of large blue-chip companies, or a UK 'growth' fund that targets smaller British companies that are likely to see rapid growth in the near future.



If you then wanted to inject more risk, you could branch out to take an investment fund abroad in Europe or the US. Other examples of more advanced investing include a UK income fund, and funds that invest in high-yield (therefore higher risk) bonds in commercial property, commodities and emerging markets.



All in all, the best way to invest in Stocks and Shares ISA's, regardless of the risk level you have an appetite for, is to aim for diversification between different asset classes such as cash, equities, bonds, property and commodities. In this way, your investment portfolio will be balanced and well-positioned to weather the natural ups and downs of the stock market.



Investment Fund Reliability


Be aware that the past performance of a fund is not a reliable indicator of its ongoing success. Funds may deliver outstanding returns for a period of time, but this can change drastically based on stock market fluctuations.



Instead of targeting a fund based on its recent positive track record, it’s more important to see how it has been made to perform in relation to the stock market index it is linked to. For example, if a UK mid-cap fund is up 10% over the past 12 months but the FTSE 250 has increased by 12%, this means it has actually underperformed. If the fund has risen by 15%, your manager has done their job well in beating the index, which is what you’re aiming for.



Also, know that because equities are naturally volatile, negative returns over a short period aren’t a cause for concern, however you need to watch how the fund performs in relation to the index, as explained in the above paragraph.



Comparing Funds


When shopping around for suitable funds to invest in, the crucial statistics to keep an eye out for are their annual performances over one, three and five years.



Otherwise called ‘discrete’ performance statistics, they should ideally rank in the top half of any published league of fund performers over each of those periods. You might also find the performance listed as being in a specific 'quartile' – this amounts to the fact that if, for example, an investment fund sector contains 120 funds; the top 30 performers represent the top quartile and the next 30 will sit in the second quartile. A well-managed fund should rank in either the first or second quartile.



Some websites also help with fund comparison by using what is called a Crown Rating. This means the fund categories receive 1, 2 or 3 crowns based on their past performance data. Funds with 3 crowns represent the top 20% of funds in their sector, the next 30% receive 2 crowns and the rest are given 1 crown.



The most important factor in choosing the right funds is to do your research. Also review each fund’s details sheet provided by your fund manager, this will give you extra information on how the fund has performed over the years.



Conclusion


A Stocks and Shares ISA, if chosen correctly, can offer you an excellent return on your investment. The above guide helps you understand the main ways to avoid pitfalls when choosing which ones will suit you best.



About the Author: Malcolm Anderson is an independent advisor on Stocks and Shares ISA's.