My savvy 10 step guide to a Stocks & Shares ISA
1. According to a study by Barclays last year, over the past 50 years stocks have returned 5.4% per year vs a meager 1.9% from cash. Remember that a Stocks & Shares ISA is essentially somewhere you can place your money in a range of different investments to protect them from taxation. Everyone in the UK over 18 has a £20,000 annual limit (for tax year 2017/2018).
2. Some call a Stocks and Shares ISA an ‘Investment ISA’ - note that these are the same thing! If you don’t utilise your annual ISA allowance by 5 April 2018, you lose it! Any unused allowance does NOT simply roll over, it's lost forever.
3. Funny enough, a stocks and shares ISA is actually counterintuitive - your money can actually be invested in things such as funds, bonds and shares.
4. Understanding the tax benefits to you are crucial:
- No tax on profits
- No tax on interest earned on bonds.
- Inside an ISA, you don't pay tax on dividends
5. This type of ISA works very differently to a traditional cash ISA. The latter is simply a savings account you never pay tax on. When investing in a Stocks & Shares ISA, there is zero guarantee of success. Investing is not right for everyone, it all depends on your risk profile. I have some friends who cannot stand the fact that their hard earned savings could be at risk. You should only invest in this type of ISA if you can ‘ride the volatility’ over the long-term - meaning, you have the stomach to ride the market highs and lows.
**ONE SAVVY WAY TO INVEST IN A STOCKS AND SHARES ISA**
A lot of millennials claim they don’t have any spare cash to invest, however, are willing to stomach the risk. Checkout the Moneybox app (click here). They round your daily purchases to the nearest pound and invest it in a stocks & shares ISA on your behalf. Also, they assess your attitude to risk and invest your money accordingly – so don’t assume that investing = losing your money….it’s all about having a growth mindset….it just depends on whether you are the tortoise or the hare!
6. Most experts recommend you invest for a minimum of 5-10 years to really feel any benefits. Why? One reason is that of compound growth (we will come onto this later). Secondly, it gives you alot more time to recover any losses and provides you with a greater opportunity to generate inflation beating returns. For me, the suitability wouldn't be right for those needing access to their cash in the near future.
7. You can buy a Stocks and Shares ISA from an online investment platform, stockbroker, bank or even an independent financial adviser. What are my millennial favourites? Moneyfarm, Nutmeg, Hargreaves Lansdown and Wealthify.
Hint – Have a look at Money.co.uk – This is a handy tool for viewing the best deals for you. It gives you an idea of what you can invest in, the minimum monthly investment and if your money is protected under the Financial Services Compensation Scheme – the latter protects your cash under £85k if the provider goes belly up...this is a MUST!
8. Beware of FEES! Remember this, many providers charge a fee for you to open one of these bad boys and hold investments within it. Some even slap you with a fee if you decide to amend your investment portfolio, withdraw your cash or simply go to another provider. The last thing you want is extortionate charges eroding any of your gains. My advice here is to ensure the provider you choose is transparent over the fee structure and that you feel 100% comfortable.
9. Competition is a good thing, so shop around. In the competitive world of investing, providers want your money and are incentivised to keep fees low. For example, online giant Nutmeg have no hidden charges and are transparent about their fee structure, which sits between 0.25%-0.75%. They have no hidden exit fees, no setup or trading commissions and offer ZERO transaction fees. Also, the more money you place with them, the lower the fees! What I am trying to say is, don’t be afraid of technology and the new breed of online players – just ensure they offer you the correct protection and are a recognised provider.
10. Millennials can benefit from something called ‘compounding’. In the long-run this is a phenomenal way to rack up the gains. The basic idea - let’s assume you have an initial investment of £250 in year one. In year two, you benefit from making money on both the initial investment (£250) and our hypothetical £50 profit earned from investing. This cycle goes on…and on…and on…and on. Warren Buffet believes compounding is the key to long-term financial success and so should you!
DISCLAIMER: It’s important you know that I don't provide financial advice and cannot recommended what might be suitable for your personal circumstances. Remember, there's ALWAYS a risk involved when investing, as your investments can go down as well as up! If in doubt, ensure you chat to an independent financial adviser before you put your money where your mouth is.