For many, expanding their ISA portfolio beyond cash ISAs is something they never consider. Cash ISAs seem a lot simpler to understand, and many are averse to the idea of venturing into a field that they haven’t fully grasped. However, these same people are often unaware that stocks and shares ISAs can be the better choice when it comes to delivering a return on their investment.
If you’re looking to expand your portfolio, read on to find out more…
Stocks and Shares ISAs Explained
A stock and shares ISA is a tax-efficient investment account. This term, ‘stocks and shares’, can be slightly misleading: in fact, they can actually contain shares, bonds, and investment funds.
As of the 1st July 2014, as a UK resident, you’re entitled to invest £15,000 per tax year in ISAs. This allowance can be placed in stocks and shares ISA, cash ISA or a mixture of the two.
A stock and shares ISA carries a greater risk than its cash counterpart, but also offers the chance of a greater reward, as the amount invested can rise and fall freely by market movements. Ergo, this type of ISA is only really suited to those who are willing to accept the possibility of loss alongside the gamble of profiting.
Choosing Which Assets to Invest In
For those considering investing in a stocks and shares ISA, such as those offered by Sanlam Private Investments, your strategy should be largely guided by how much risk you’re willing to shoulder…
Cautious Investors
Even for the cautious investor, there are options aside from leaving all of your money in cash that may be of benefit to you. Bonds, for example, pose a much lower risk than shares, and can still perform better than cash, particularly in the current low-interest-rate environment. Thus, a suitable strategy to increase your chance of profit, without running too great a risk, could be to invest the majority of your allowance in cash, whilst putting a small amount into government or corporate bonds. Although this will not make a drop in the value of your portfolio impossible, it will minimize your risk, and bond funds have an excellent record for preserving and increasing investor capital.
Balanced Investors
A more common stance is to want to increase your risk of profit without entirely throwing away your defensive position. If you fall into this category, then it may be worth taking a tentative look at the stock market. One of the best introductions is to consider funds.
The best types of funds for the balanced investor are those that invest in larger companies in developed markets or defensive global funds. Look, in particular, for companies that pay dividends, as strong companies will usually continue to pay these even when they’re struggling slightly and profits and share prices are looking less than rosy.
High-Risk Investors
For those who are prepared to accept a true risk in return for the chance of a potential yield, one of the highest risks yet potentially one of the most rewarding strategies is to look at small to mid-cap companies and emerging market funds in an attempt to cash in on capital growth.
Ultimately, the most important decider of your success will be the individual decisions that you make. There will always be a risk involved with investing in stocks and shares ISAs; no one can avoid this completely. However, there is also a real chance of making a profit. When the time comes to decide whether it’s worth allotting some of your allowances to this type of ISA, it simply comes down to this: how much of a risk are you willing to run?
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