Congratulations! If you’ve landed on this page then it means you’re serious about investing for the long-term and most probably fed-up of sub-par returns on your savings held in bank accounts. Holding stocks and shares as part of a diversified portfolio is great, but setting up an account to hold them in can be daunting. Use this guide below to help you navigate the minefield…
Why hold stocks and shares in an ISA?
Stocks and shares can be held in any type of account with a broker e.g. within a Self Invested Personal Pension (SIPP), Junior ISA or Stocks and Shares ISA. So which account should you use? I can’t give you the answer, but my reasons for investing in a Stocks & Shares ISA are:
1) I want a tax-efficient way to save money. With the £15,000 limit of saving into any ISA (as of July 2014), I have the potential to keep £100,000 in savings without any of the returns going to the tax man within 7 years (assuming I put the full limit in every year).
2) I’m keen to broaden my portfolio for long-term growth, but don’t want to restrict my access until I hit 55 (like you would with a SIPP)
3) The annual cost of holding a Stocks and Shares ISA is low…or can be kept low by using a competitive broker. See Broker below.
No one can tell you the ‘right’ amount to invest in any product. As a rule of thumb, you should only invest money that you can afford to lose. Once you’ve decided on an amount, you need to consider whether you want to invest it as a lump sum (just invest once and leave it alone) or invest money over time. Investing a lump sum can be appealing for those who have received a windfall whereas investing over time is convenient for those who wish to invest a portion of their paycheck every month.
What should I put in the ISA?
Whether you invest in funds or shares, you need to decide on what your tolerance for risk is and how long you can leave your money untouched. A rule of thumb is that you shouldn’t invest money that you will need in the next five to ten years. The stock market is not like a bank account and you don’t have a fixed rate of return, which often means that the value of your holdings may go down in the first five years and result in you receiving less than the amount you invested at the start.
Which broker should I use?
It may be natural to assume that you’d go for the broker that offers the best rates for each investment transaction (i.e. the fee you pay for purchasing a fund or share), but keep in mind how you wish to manage the account: on the go via your smart phone, online or over the telephone. Another aspect to consider is which funds do you want to invest in? As a die-hard Vanguard investor, I needed a UK broker who had Vanguard funds in their supermarket. Initially I invested with Alliance Trust Savings as they had won numerous awards of excellent customer service (one of my non-negotiables as there’s nothing worse than trying to retrieve money from a company who turns the whole process into an interrogation) and provided access to Vanguard funds. At the time I started investing in 2010, there was just one other UK broker who provided Vanguard funds. Today, I’ve gone with Charles Stanley Direct who have won similar awards, but who provide the most competitive brokerage fees and don’t use a switchboard for their telephone queries.
In summary, ask yourself:
1) Do I need to have access via my smart phone on the go or can I stick with just accessing my accounts on a computer or over the telephone? (Not all brokers provide an app for investing)
2) How much am I willing to pay for brokerage fees? What do I get for my money?
3) Are there any annual fees for just holding an account? (People can often get stung by this. This was my primary reason for leaving Alliance Trust Savings)
How long will it take to open an account?
Setting up your first ISA should take no longer than 5 – 10 working days. It varies from each broker like it does with banks, but the process for applying is straightforward and shouldn’t be daunting. Every broker will set an expectation for how long it will take to process an application.
Will I lose money?
You may or may not lose money. Unlike a bank, your money is not guaranteed under the FSCS scheme so keep in mind that you should not invest any money that you cannot afford to lose. This is something to keep in mind with any investment.
What else should I be aware of?
Read our Index Funds article to get an example of what you can invest in within your Stocks & Shares ISA.
Do I have to declare my ISA to the HMRC?
No. Individual Savings Accounts whether they’re cash or stocks are tax-free savings products so any interest you earn will be free of tax.
All information provided at Life-Life Balance is for informational purposes only. MM is not a qualified financial advisor. Before making any decisions on your finances you should seek advice from a qualified advisor.
*Image courtesy of jannoon028 atFree Digital Photos.