A common question recently has been whether now is a good time to top up my stock and shares ISA. The thinking behind this question is that perhaps advantage can be gained as markets have fallen, and that with the base rate at 0.1% there are few if any attractive cash ISA deals around currently. Add to this that you can find better interest rates from standard non ISA accounts, and with the personal savings allowance to consider, for most people there is probably limited value in committing this year’s ISA allowance to cash ISAs.
However, moving from cash to stocks and shares means increasing risk. Although markets are lower than they were a few months ago, there is always the risk that they could fall further. Despite the recent recovery, we may not have seen the bottom of the market yet.
One option to consider, rather than investing once with a lump sum, is phasing your investment over a period of time. This can reduce market timing risk and remove the issue of trying to second guess short term market movements. Phasing can be achieved by initially holding the investment in cash and then drip feeding the cash into your chosen investment funds or portfolio over a period of time. By drip feeding, contributions invested in months when markets are higher will buy fewer units, however, those invested when markets are lower will buy more units. Overall, the purchase price of units will be averaged out over a longer period. We call this ‘Pound Cost Averaging’ and this can be particularly useful in periods of higher volatility.
Remember that all investments should normally be held for a minimum of 5 years. Over such a time period we would expect values to increase, and drip feeding could help to smooth out any short term market volatility, though of course there are no guarantees.
