In the midst of the ‘ISA season’ noise, David Prosser discusses why any saving is better than no saving.
The fund management industry doesn’t do subtle. Over the next few weeks, you can expect to be encouraged, begged and harried into using your individual savings account allowance before the final day of the tax year on 5 April – use the £15,240 ISA allowance or lose it for good, the message will be.
In practice, however, that figure can be off-putting. Only a relatively small number of people have that kind of money at their disposal – few savers and investors ever use their ISA allowance in full, but for many people, the subliminal marketing message during “ISA season” is that it’s not worth investing unless you can do so.
Nothing could be further from the truth: any saving at all is better than no saving. And for most people, the much more practical alternative to a large lump sum investment is to embrace regular savings schemes that allow you to make regular monthly contributions to your ISA over the course of a full year.
Regular saving for more than 30 years
Investment companies have now been offering these schemes for a little over 30 years. The idea is that month-in, month-out, you invest a fixed cash sum in the fund (or funds) of your choice, with minimum contributions starting from as little as £25. From acorns grow big oak trees: if you had put £100 a month into a fund tracking the UK stock market over the past 20 years, you would today have an investment pot worth just over £46,000.
During that period, you would also have benefitted from a smoother run than investors who put one large lump sum into the market. When markets fall, your fixed cash sum buys more shares in the funds in which you’re investing, so regular saving cushions the natural peaks and troughs of the stock market.
Financial adviser Hargreaves Lansdown has just published an interesting table of the investment company regular savings schemes that are most popular with people who invest through it. The table includes two UK-invested funds, Finsbury Growth & Income and City of London, two global stock market funds in Scottish Mortgage and Woodford Patient Capital, and one compromise option, RIT Capital Partners, which invests across a range of asset classes with the aim of preserving capital.
Those funds won’t be the right choices for everyone’s personal circumstances and investment goals, but they give a flavour of the range of assets on offer from investment company regular savings schemes. In these five funds alone, investors can choose between UK and international equities, as well very different levels of risk.
Investing for the long term
Depending on how much you have available to invest, there’s no imperative to choose just one investment company for your ISA. Through an ISA wrapper on an online platform, you can diversify through commitments to several different regular savings schemes. With £250 to invest, say, you could put £50 a month into all five of those investment companies.
The bottom line is that regular savings schemes offer a much more accessible and affordable route into investment markets. They encourage you to be a disciplined and committed investor over the long term, rather than someone who makes a last-minute decision to use your ISA allowance at the end of each tax year.
So when the marketing is at its loudest over the next few weeks, don’t be put off if a £15,240 investment is out of reach. By all means, use as much of your ISA allowance as you can, but a regular savings scheme into which you put even small sums will still pay off over the long term.