This piece first appeared in Radio Times on 30 September 2000
The text here may not be identical to the published text

Stock-market ISAs

10 things you need to know

STOCK MARKET ISAs

1. I’M A BIT NERVOUS ABOUT THE STOCK MARKET. SHOULD I GO FOR AN ISA?

An Individual Savings Account (ISA) can be a good place to start with a stock market investment. Remember that investing in stocks and shares is not safe. You can lose money. But over the long-term, the stock market has been the best way to make money, out-performing any other form of investment, and doing spectacularly better than putting your money on deposit in a bank or building society.

2. HOW LONG IS LONG-TERM?

Three years is the absolute minimum. Five is good. Ten years is better. So only put money in the stock market if it is money you can afford to put it away and forget about it for at least five years.

3. SO WHAT ARE THESE SHARES ISAs?

An Individual Savings Account (ISA) is a way of investing money that hides it from the taxman – legally of course! Any dividends, interest or gains you make will not be taxed. You can invest your money in an ISA either in cash in a bank or building society account (see last month’s column), or in shares in companies.

4. WHAT ARE THE LIMITS?

The total amount you can invest in an ISA is £7000 in this tax year 2000/01. You can invest up to the whole £7000 in a shares ISA. That’s called a maxi-ISA. Or you can put up to £3000 in a shares ISA and up to another £3000 in a cash ISA. These are called mini-ISAs. The other £1000 can go into an insurance ISA. They were a bright idea of the Government that has not really caught on. Very few companies sell them and they are probably best avoided.

5. SO WHAT’S BEST?

If you really think you will invest more than £3000 in shares before April 2001, then go for the big one – the maxi-ISA. If you will not invest more than £3000 before next April, then go for the mini-ISA, that leaves you free to put some money into a cash ISA too. And don’t worry if you haven’t got that much money. You can invest as little as £50 a month in a shares ISA.

6. WHICH SHARES SHOULD I CHOOSE?

There are three ways to invest in shares. You can spread your investment over the stock market as a whole – these investments are called ‘trackers’ because they track the movement of shares across the whole market. You can go with a managed fund – which has an investment manager who uses their skill and experience to decide where to invest the money. Or you can choose the shares yourself – that’s called a self-select ISA.

7. WHICH IS LEAST RISKY?

For a beginner, a tracker is probably best. Trust to the market to go up in the long-term. You can put your money in a fund which tracks either the top 100 companies or what is called the ‘all share’ index, which follows about 900 companies.

8. SURELY IT’S BETTER TO HAVE A MANAGER?

Every year, trackers beat most managed funds. And in the very long-term trackers do better than any managed fund. If you go for a managed fund, you have to decide which one. Although you can find out which did well last year, or in the last five years, no-one can say which will do best this year. But if you want to go for a managed fund then pick one with a good track record of outperforming the stock market index and hope it carries on. I would not recommend picking your own shares unless you have been investing for some time and are very confident – or like a gamble.

9. SO BUNG IT IN A TRACKER AND FORGET IT FOR FIVE YEARS?

Well, almost. You still have to choose your tracker. Some have lower charges than others, and some do a better job of tracking the market than others. So even with a tracker, check the performance over the last few years, and pick one with low charges – that means no initial charge (some funds take a percentage of your money up front) and a low annual charge – 0.5% of your money is a good target; 1% an absolute maximum.

10. WHAT IS A CAT ISA?

The CAT standard is a Government initiative and it means that the product sold has low charges, is easy to get out of without penalties, and at least half the money is invested in Europe. But it does not cover the most important aspect of an investment – performance. And it cannot, of course, say if a particular product is right for your circumstances. So CAT is good, but not necessarily the cream.

 

 

30 September 2000


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