Stocks and Shares Isa option turned £20,000 into £118k but ‘savers need to be brave’ | Personal Finance | Finance

Experienced investors may see this as an opportunity to buy shares and funds at a discounted price, especially after Friday’s sell-off.

Yet others will be worried for fear the banking crisis will spread as contagion hits Deutsche Bank.

Every adult can invest up to £20,000 in an Isa each tax year, although most only use a fraction of their full allowance.

Yet paying in smaller sums is still scary, because nobody wants to part with their money only for stocks to crash next day.

The volatility of the last year has brought an old question back into focus, whether it’s best to invest one-off lump sum or spread your risk by making regular monthly payments.

You can put money into a stocks and shares Isa without investing it all on day one, said Jason Hollands, managing director of investment fund platform Bestinvest. “Most Isa platforms let you put money into a cash account to secure your allowance, while you decide which shares or funds to buy.”

This should not be confused with the cash Isa, which is intended solely as a deposit account. It’s a temporary measure to secure your allowance while you decide where to invest.

This allows you to drip feed money steadily into the market over weeks or months, rather than pumping everything in before the end of the tax year.

Investing little and often is safer, but there’s a catch.

A one-off lump sum will typically give you a “considerably” better return for one simply reason, said AJ Bell head of investment analysis Laith Khalaf.

“All of your money goes into the market on day one, so it has longer to compound and grow.”

AJ Bell figures show that somebody who paid a £20,000 lump sum into the average global equity fund 20 years ago would have £118,570 today.

If they have invested 240 monthly instalments of £83.33 instead, their money would only grown to £51,360. “That’s less than half the value, despite the same cash outlay.”

Going all out can pay off but you need to be brave as the banking crisis rages.

Timing matters when you invest a lump sum, with those who invest at the bottom of the market doing better than those who invest at the bottom.

Someone who invested £20,000 into the market 20 years ago will have got their timing just right, as it was the bottom of the bear market in 2003, three years after the tech stock crash.

A lump sum invested directly before a crash may also deliver a superior return to regular monthly investing, but the gap is much narrower.

READ MORE: Cash ISAs vs savings account – ‘Best place’ for cash as tax end looms

Someone who invested £20,000 in the average global equity fund in October 2007, just before the financial crisis, would have £58,636 today. That compares with £42,476 if invested in monthly sums of £108.11.

Khalaf said a combination of the two offers the best of both worlds. “As we approach the end of the tax year, many investors will be stuffing lump sums into their Isas, but there are compelling reasons why they might set up a monthly Isa investment plan at the same time.”

First, it gives you a smoother journey, with less dramatic ups and downs, as your money is fed into the market gradually.

“Less of your capital is exposed, and you also benefit from market dips because your monthly contributions continue to buy shares at cheaper prices.”

There is another advantage, Khalaf said. “Lump sum investing is all well and good, but you need to a large chunk of money available to do it. Regular saving, by contrast, can simply be drawn from monthly earnings.”

It also removes the temptation to time the market with lump sums, which is hard to do with consistent success.

Instead, the cash is taken automatically from your bank account every month by direct debit and invested according to your standing instructions. 

“It also eliminates the chance you might forget to use your annual Isa allowance, which might prove the biggest mistake of all,” Khalaf added.

Victoria Scholar, head of investment at Interactive Investor, said: “Investing a lump sum is less risky if you plan to keep the money invested for at least five years and ideally much longer, as that gives you time to recover from short-term volatility.”

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