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Perfecting your ISA portfolio

Contributor J.P. Morgan Investment Trust Team

 

ISAs give individuals the chance to invest in a range of assets. But it’s important to consider your appetite for risk before selecting any investments.

Another year rolls by and again the “ISA season” draws nearer, the start of a new tax year and the chance to open a new Individual Savings Account. Launched in April 1999, ISAs have proved resoundingly popular with millions of investors. But every investor is different, so what principles lie behind assembling the right ISA portfolio for you?

ISA benefits

The Individual Savings Account (ISA) reigns supreme as the favoured way for millions of people to get access to the stock market.

That is hardly surprising when you consider the tax breaks available to ISA holders. Money is paid in out of taxed income (in contrast to pension contributions) but, in the words of the Government’s own website: “With a stocks and shares ISA… you don’t pay tax on any income or capital gains from your investment.”1

During the current tax year, £20,000 can be spread across the different ISA types. As for what emerges in terms of investment returns, the sky is the limit, with no cap on the amount that can be earned free of tax.

Selecting investments

For the stocks and shares ISA investor, then, the critical factor on which returns will depend will be the selection of investment assets. This, in turn, will reflect each individual investor’s appetite for risk.

Some risk is unavoidable – an investment is unlike a bank deposit in that there is no guarantee your money will be paid back to you. By way of compensation for this, those investments that do well ought to pay significantly more than the interest available on deposit accounts.

So there will be risk, but how much is up to you. It is a truism that higher risk tends to be equated with higher potential rewards – were it otherwise, there would be few takers for the riskier investments. But that is of less importance than the need for each investor to be happy with the level of risk in their portfolio.

Weighing up risk

In general, someone investing for the long haul can probably afford to take more risks than someone with a shorter time horizon. That is because asset values, especially those of equities, tend to rise over time, thus the portfolio ought eventually to “come right”.

For the low-risk investor, the traditional backbone of their portfolio has been bonds, whether government paper such as British gilt-edged stock or investment grade corporate bonds. The coupons that they pay are set in advance (hence the phrase “fixed income”) and the likelihood of default– for instance of a British gilt-edged stock – is remote. Predictability is everything, although of course the market value of the bonds can rise and fall.

Sitting alongside these bonds may be some exposure to equities in blue-chip companies at home or in the eurozone and the US.

At the opposite end of the spectrum would be a high-risk portfolio, assembled by investors with a much greater risk appetite. Looking round, it is clear that those seeking a more adventurous investment strategy are spoilt for choice.

They can look to emerging market investments, riding the ups and downs of those economies seen as having the potential for future success. Or they may prefer to back smaller companies at home, those with more potential for growth – and for failure.

The more experienced investor may seek out commodity producers such as natural resources. Or they may prefer convertible bonds that can be exchanged for equity at a future date.

Somewhere in the middle is the medium-risk portfolio, a blend of the two approaches that would have a broader balance between bonds and equities and would meet the needs of those who wish to mix riskier elements of their portfolio with less volatile investments.

Investment trusts are one type of investment vehicle which are available through a stocks and shares ISA. Our investment trust range offers access to a range of markets and business sectors-to find out more about our investment trust offering click here   .

The need to review risk

ISAs offer a tax-efficient way for ordinary investors to put their wealth to work in the share and bond markets. But a thorough appraisal of each investor’s attitude to risk is an essential first step in creating a portfolio that suits them.

Sources:

1 Source: Gov.UK


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