Investment timing is impossible to predict. Anyone presuming that the stock market has already hit rock bottom this year could be proved sadly wrong, while banking on further falls could be a gamble that falls wide of the mark.
But the market’s very volatility could make it an ideal time to start this year’s stocks and shares ISA. However, rather than sticking in a lump sum now, investors can play a bit canny and start a regular savings scheme.
By doing so you could benefit from a process known as pound-cost averaging. By drip-feeding your cash in regular monthly amounts into an investment you spread the cost. So, rather than risking buying overpriced shares at the top of the market you average out the cost so that, as markets fall, you end up buying shares much more cheaply. Alternatively, if markets rise, you’ll end up buying shares cheaper at the start of the period than the end. However, if markets continue to rise then you would have been better off investing a lump sum at the start.
No one knows what will happen so a regular savings scheme will smooth out stock market volatility and mean that a sudden fall won’t wipe out much of your savings. It will just give you the opportunity to buy in at less cost.
“Regular saving gives you a lower risk profile by smoothing out the highs and lows,” points out Annabel Brodie-Smith of the Association of Investment Companies. “When markets are suffering, like now, you buy more shares cost effectively and when markets improve you buy less shares when they’re more expensive, so you do not have to worry about deciding when is the best time to invest. In fact, many fund managers use the advantages of regular saving to drip-feed money into their chosen shares.”
A regular savings plan isn’t suitable for short-term investments. Mark Dampier of Hargreaves Lansdown says you should have a viewpoint of at least 10 years. But then you should monitor your investment to maximise the opportunities offered by pound-cost averaging. “If your investment’s looking poor after three or four years, don’t despair. It will be an opportunity to buy units or shares on the cheap so you should be thinking about putting more money in,” he says.
Jason Witcombe of Evolve Financial Planning is a fan of regular savings schemes for equity ISAs. “I do it with my own money and it’s the right thing to do for the vast majority of people,” he says. “You’re reducing market-timing risk and it’s also much better for your own personal cash flow.”
You can put up to £7,200 into an equity ISA in the current 2009-10 tax year. Thinking about which funds to invest in now can mean avoiding the panic of waiting until the deadline at the end of the financial year. However, even with the smoothing effects of regular saving you shouldn’t simply pick an investment and continue to drip-feed your cash into it.
You should get into the habit of checking performance regularly – every six months or so – and if your fund has slumped drastically, consider switching into another one. However, it does mean falling prey to the investment risk of timing. Switch at the wrong moment and you could move out of a fund that suddenly soars.
For that reason, John Stewart of PMI Independent Financial Advisers suggests investing into a boring old tracker. “Trying to pick a fund is a tough call – last year’s star performer could be this year’s dog,” he says. “A lot of fund managers charge a lot but don’t seem to deliver. I’d recommend a UK tracker which has lower charges and you’ll get returns mirroring the growth of the Footsie. Investing in an| equity ISA should be a long-term plan and, while the UK may not look too hot right now and may be slow to come out of recession it should be in recovery mode within three years, which is a good idea as you'll have picked up units while they're cheap."
Anyone looking for returns that can outperform the major stock market indices needs to be in a well-managed fund. We've asked five independent financial advisers for their fund tips for a regular savings scheme feeding a 2009-10 ISA.
What the experts recommend
We asked for a selection of tips, ranging from low to high risk. Low risk doesn't mean no risk, and anyone who isn't prepared for their savings to fluctuate in value would get greater peace of minding saving in a cash ISA.
Martin Bamford, Informed Choice
M&G Corporate Bond: low risk
"Corporate bond funds remain in vogue as an alternative to cash. This fund has delivered above average returns ."
Jupiter Merlin Balanced Portfolio: medium risk
"This offers access to a range of funds from leading managers. While you pay more for delegating the fund selection to Jupiter, you can take more of a back seat with the investment decisions."
Aberdeen Emerging Markets: high risk
"The emerging markets sector was hit hard by the global recession but this fund would be a good choice for when things recover. It invests across a number of regions such as Emerging Asia and South & Central America."
Nick Breen, Worldwide Financial Planning
Newton International Bond: low risk
"A quiet yet very consistent performer, this fund is focused on delivering both income and capital appreciation from the bond markets of the world."
CF Miton Special Situations: medium risk
"The stage is set for special situations to step up to the plate and deliver returns. This fund has done so to date and should feature in a portfolio."
Martin Currie Asia Pacific: high risk
"Fund manager Jason McCay knows what he is doing and this fund should continue to provide good returns from what is a very exciting sector."
Brian Dennehy, Dennehy, Weller & Co
Henderson Strategic Bond: low risk
"I believe there is still potential in corporate bonds but it's important to buy a fund where the manager has lots of flexibility."
M&G Recovery: medium risk
"I'd go for a UK-focused fund and M&G's offers pedigree, experience and a hard to beat track record."
Jupiter India: high risk
"The India stock market is showing some relative strengths compared with other markets. Taking the long view, India has 25 per cent of the world's under-25s, which shows huge potential dynamism."
Mark Dampier, Hargreaves Lansdown
Casenove Absolute Target: low risk
"The fund hasn't had a great time over the past few weeks, but it aims to achieve about an 8 per cent return. It should produce near to its target over the long term, say 10 years."
Invesco Perpetual Income: medium risk
"Neil Woodford is one of the great managers and he is still likely to be around for at least the next five years. Returns from this fund may be volatile, but you've got to be prepared for falls if you're investing for the long-term and benefiting from pound-cost averaging."
Aberdeen Emerging Markets: high risk
"It invests in Asia and emerging markets, which will be the growth area. They have none of the baggage we have in the west."
Darius McDermott, Chelsea Financial Services
CF Miton Special Situations: low risk
"It made a profit – up 2.5 per cent – over the past 12 months, which is staggering. It's 30 per cent invested in cash but Martin Gray is one of the industry's premier currency managers."
Artemis Income: medium risk
"It's a proven fund manager in a sector that looks at dividends as part of the total return, which is a story I like this year."
First State Asia Pacific Leaders: high risk
"I think it's probably the best Asian fund available to UK investors. Fund manager Angus Tulloch has an experienced team with an astounding long-term track record. They've done well in down as well as up years."