31st March 2014
With the tax year deadline only five days away, lots of savers will be making quick decisions about their annual allowances. But in their rush to make their choices before Saturday’s deadline, savers may be susceptible to a number of investment errors.
Tom Stevenson, investment director at Fidelity Personal Investing, gives a five-point guide to ISA savers to avoid becoming April fools…
1. Make sure your eggs are in different baskets
It is important to remember to spread your money – and your risk – over a good variety of different assets, from a range of regions and sectors. Putting all of your eggs into one investment basket means you’re tied to the fate of one particular asset. To gain instant exposure to a range of securities, many savers choose to hold funds, which give you access to a whole pool of opportunities. You could lose some or even all of your savings overnight by putting all of your money into one stock, whereas investing into a fund gives you exposure to the market while spreading your risk more widely.
2. Remember not to leave too much of your money in cash
One of the biggest mistakes made by savers in Britain is leaving a large proportion of their money in cash savings accounts. UK interest rates are at historic lows, and those saving in cash risk real-terms losses on their money, due to possible inflation rises in the future. If a saver had invested £15,000 into the FTSE All Share index over the 10 year period from 31 March 2004 to 28 February 2014, they would now be left with £35,218.50. If however, they had invested £15,000 into the average UK savings account over the same period, they would be left with £16,582.65.That’s a difference of £18,635.85.
3. Do your homework
Most of us can think of more exciting ways to spend our time than sifting through investment research to find the best addition to our ISAs. But when it comes to making decisions, it is important to make the most of the information available – or you could lose out. Luckily, DIY investment tools are now easier to use than ever. There is a range of websites giving information about fund providers and their products.
4. Know your risk, and plan accordingly
Linked to the lack of proper homework, there are lots of savers who fail to account for their risk tolerance when planning to invest. Knowing your risk is a personal and individual responsibility – and no two investors are the same. Once you’ve decided your preferred level of risk, you can take advantage of support systems which choose different investment options for you, based on the risk you are willing to take.
5. Remember that you cannot rely on past performance of investments
When it comes to investing, it’s important to remember that previous performance is not a good guide to future performance. There are plenty of examples of stocks, sectors and indeed fund managers with strong track records and subsequently disappointing performance. One of the main reasons why bonds have been the asset class of choice for the past few years has been investors’ tendency to extrapolate the recent past into the future. By focusing on equity markets’ ‘lost decade’ from 2000, many investors have missed out on the near doubling of the market since the low of 2009.