Do ISA Yourself – Part I

15th November 2021

Individual Savings Accounts (ISAs) are a great place to start your journey to financial freedom. They are not as tax-efficient as pensions, but you don’t have to wait until you’re really, really old to take your money out. This is good because there will probably be things you need to spend your money on before you are wrinkly and smell of wee.

The thought of getting an ISA will most likely pop into your head when you find you’ve got a bit of spare money knocking around. (If you don’t have any spare money knocking around you can stop reading now. You don’t need an ISA, you need a better job or better spending habits.) When this thought occurs the next thought should be ‘but what kind of ISA should I get?’.

Types of ISA

There are three main types of ISA that you might want to consider –

Lifetime ISA – good for young people (under 40) saving for their first property

Cash ISA – good for, well, not very much really unless you like seeing your savings eaten away by inflation

Stocks and Shares ISA – good for people who are saving for medium-long-term goals, are too old for a Lifetime ISA or have already bought their first property, and want the potential to achieve returns that beat inflation

I’m going to concentrate on Stocks and Shares ISAs here, but if you want to find out some more info on Lifetime ISAs check out these websites…

https://www.moneysavingexpert.com/savings/lifetime-isas/

Cash Lifetime ISA *NEW*

(P.S. Any links in this website in no way constitute a recommendation or endorsement of any particular product or company. Everything is purely for information only.)

I was scathing about Cash ISAs just now. I apologise. There are some rare cases where a Cash ISA might be useful. For example, if you’ve got lots and lots of money in the bank, want to avoid investment risk like the Covid-19 virus, and are already earning interest that exceeds your Personal Savings Allowance.

If you are this very rich and somewhat boring person you can check out Cash ISA interest rates here – https://www.saversfriend.co.uk/

Still reading? So, you’re think you’re ready for a Stocks and Shares ISA, hey? Ok, lets go!

Stocks & Shares ISA

A Stocks and Shares ISA is an investment account. Don’t be fooled by the name that it’s a savings account. Risk is involved but how much risk can vary greatly.

Things you can put in your Stocks and Shares ISA (it’s not just stocks and shares)

This could be a very long list…but I’m going to keep things simple. Your ISA might contain…

Bonds (Fixed Interest) – the safer bit
Stocks and Shares (Equities) – the risky bit

If you don’t already know, please educate yourself on what these two ‘asset classes’ are, how they act, and the different levels of risk involved. This doesn’t need to take long and here is a good place to start –

https://global.pimco.com/en-gbl/marketintelligence/bond-basics/how-are-bonds-different-from-shares

This infographic will give you an idea of the risk/reward trade-off when considering the split of bonds and equities that is right for you.

Expected returns and volatility

You could also include property and commodity investments in your ISA, but I think for most people this adds too much complexity for not very much benefit. I keep things simple and stick to an appropriate mix of equities or bonds.

The higher the equity allocation in your ISA, the higher the expected return…but the ups and downs will also be more severe. I sometimes use an analogy of a speedboat…

A 100% equity portfolio is a completely empty, super-light speedboat. It will go extremely fast, get you to where you want to get as quickly as possible, but when the weather gets rough it is a very bumpy ride.

If you don’t like the bumps you can weigh down your speedboat with some bonds that act as ballast. The boat won’t go as fast now, it will take you longer to get to your destination, but it’s a smoother ride.

The important thing is that you can hold on and don’t jump out of the speedboat in the middle of the ocean. You need to know before you get in how well you’ll be able to handle the rough seas and make sure you’ve got enough ballast to make the journey smooth enough for you to stay in the boat!

Right, that’s enough for today. Next time we’ll talk about how DIY you want to be when actually choosing your investments and setting up your ISA.

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