In the lead up to ISA Season 2010, Morningstar.co.uk researched the saving and investing habits of its readers to gauge their use of, and understanding of, Individual Savings Accounts or ISAs. A total of just under 1,400 readers responded, of which an overwhelming 90% said they do invest in ISAs and about two-thirds (64%) of these had either already fulfilled their 2009-2010 ISA allowance of £7,200 (£10,200 for over-50s) or they intended to before the end of the tax year. So, on the eve of the final working day of the current tax year, what else did Morningstar readers tell us?
Do You Take the Investment-Provider's Word for It?
It came as no surprise to us that our readers are an engaged bunch when it comes to money matters and the vast majority are clearly on the ball when it faced with taking advantage of tax-free savings and investments. We all know how tough the last few years have been—on our wallets, our investments and pension values, and on the value of our physical assets—so perhaps the fact that a third of Morningstar users have not topped their ISAs up to the total allowed amount this year can be forgiven. However, what did raise a few eyebrows was that though investors conduct their own research of ISA providers and ISA-eligible investments, only a little over half (58%) seek out an independent view.
It seems that investors are still easily swayed by advertisements and don't always look further into the facts and that’s exactly where we at Morningstar believe we can make a difference. Not only do we advocate asset diversification, successful asset allocation, and the importance of understanding your risk tolerance (all of which are covered in numerous articles that can be found in our article archive), but our belief in the benefits of funds has led to Qualitative Ratings Reports that are designed to lift the covers on these funds and tell it like it really is. In addition to our more traditional quantitative measure, the Star Rating, which looks solely at past performance, our Qualitative Ratings drill down into fees, management and process, as well as taking a broader look at the fund family and its history. We don’t want to blow our own trumpet too strongly, but we really believe this method of analysing funds can be a huge help to investors seeking an independent view before taking the jump. In fact, I recently used our Qualitative Research to select my own investments to be placed in an ISA over the following 12 months. (Find out what I chose, how and why, in this article.)
Are You Basing Your Decision on the Right Factors?
Interestingly, and a tad worryingly, the largest proportion (44%) of ISA investors surveyed based their investment decision on past performance, despite the ubiquitous disclaimer “Past performance is not indicative of future results…”. Brand familiarity and top-sellers were other high scorers, attracting 12% and 11%, respectively, yet here at Morningstar we really try to highlight the importance of looking beyond such measures and taking that little bit of extra time to understand what lies beneath.
We all know that today’s winners can be tomorrow’s losers but when time is tight it’s all too easy to follow the crowd or to allow your investment decision to be swayed by impressive statistics. Taking a little extra time before taking the leap, however, can actually save you time in the future: if you’ve done your research and you’ve come up with an investment, or range of investments, that suits your financial goals, you shouldn’t need to revisit your portfolio more than twice a year, when your portfolio may need a check-up and some rebalancing. Furthermore, if you put your investments on autopilot and set up Direct Debit payments to invest regular amounts on a regular basis, you’ll also benefit from pound-cost averaging, as well as being safe in the knowledge that your money’s working for you while you’re busy playing (or, more likely, also working).
You're Mostly Confident of When to Reach for the ISA
The main reasons cited for saving and investing in ISAs were to supplement an existing pension (46%) and for a rainy day (26%). A total of 87% ISA users said they feel confident that they understand when to use ISAs and when to use alternative investment or saving vehicles—an encouraging statistic indeed. If investing in an ISA wrapper is your first foray into investing then you might do well to look into a global fund (as you’ve probably realised by now, we’re strong advocates of funds because they give you very good diversification and help you avoid the risk of putting all your eggs in one basket). You could consider an asset split between equities and bonds, again to lower some risk. Conventional wisdom provides a simple yardstick for allocating assets, which is to have your age in bonds, so a 30-year-old would opt for no more than 30% in bonds as their long time horizon means they can accommodate more risk, while a 70-year-old would have the vast majority of their portfolio invested in more low-risk areas such as bonds. For investors just starting out, one really easy way to diversify is to use an exchange-traded fund (ETF) or a tracker fund. They’re very cheap, the only risk you are taking on is a market risk, and they’re diversified. For more on ETFs, check out our ETF Centre.
If you’re placing investments in an ISA tax-efficient wrapper as part of a larger portfolio, you really need to think hard about what it is you’re trying to achieve from those investments. If you’re going to be wanting to withdraw some income from your ISA portfolio later on in life, then it would be good to build up that income because, of course, the beauty of ISAs is that any income accrued is tax free. You may want to place investments that you think are going to offer you the highest capital gain over the long run in your ISA as, again, capital gain is going to be tax free. It's important to stay in this long-term mind set—look a minimum of three to five years out.
Additionally, if your ISA is just one part of your portfolio, then you also want to be sure you don’t have too much overlap between assets—Morningstar’s X-Ray tool can instantly show you where your investments might be duplicated.
Cash ISAs and Interest Rates
Morningstar readers are split roughly 50/50 between those who like to invest their full ISA allowance in stocks and shares and those who prefer to split it between investments and cash. With just over half saying that, for the cash portion of their ISA, they would opt for a fixed interest rate in 2010-2011, it appears savers are undecided about whether the interest rate is likely to increase this coming tax year. Incidentally, current market consensus is that the Bank of England won’t start to raise rates until the final quarter of 2010 or beyond.
Age and Gender Gaps in ISA Investing
So far, we’ve only looked at those Morningstar readers who do take advantage of ISA savings and investments, but what about those who don’t? Two thirds (67%) of those who use ISAs are over 50 years of age and predominantly male (89%), while a mere 6% of ISA-users are under the age of 30. Yet of those who do not save or invest in ISAs, a much higher proportion is in their ‘youth’ (24% are under 30) and of these younger, would-be investors, the balance is relatively more equal between men and women at 2:1. There are some interesting points to note here.
Firstly, the younger generations are still reluctant to save and invest in this way. So why is the 30-and-under segment not taking advantage of ISAs? Our research shows that the main reason is they don’t know enough about these tax-efficient vehicles (28%) or they want to but keep forgetting (21%). As a 30-year-old myself, I understand the time constraints and other demands on our finances, but as Editor of Morningstar.co.uk I also understand the benefits of these vehicles and of getting into good savings and investment habits. I’ve long put off investing in ISAs for one reason or another but as of next week, when the new tax year kicks in, I’ll be investing my hard-earned cash in an ISA-eligible fund. Read more about how to use Morningstar resources to select suitable investments here.
The second point worth noting—and this is an encouraging one, in my view—is that, while men have traditionally been the breadwinners and finance organisers, our financial habits are finally catching up with a changing society whereby women are not only more independent but are also earning more. Still, with only 11% of respondents ticking the 'female' box, we've a long way to go. To take our analysis one step further, I note with biased interest that 45% of those females under 30 who do not make use of ISAs claim to fully understand the benefits but say they have other priorities while only 7% of men ticked this answer. None of the women said they couldn't afford to, or that they preferred to spend their money elsewhere, compared to 21% and 7% of men. It would appear that it’s the men-folk who need the most education, not only about ISA investing but about general money management…unless, of course, the ‘other priorities’ listed by women include dresses and handbags but I’m hoping these instead refer to paying down debt or saving for a deposit on a property.
The new tax year starts Easter Monday (April 6) in theory or Tuesday April 7 in practice. Individuals can invest up to £10,200 in stocks and shares in the 2010-2011 tax year, or £5,100 plus up to another £5,100 in cash. With interest rates so low you might wonder “why bother?” But this is a prime opportunity to start your investing career and get into the habit of investing regularly—learn more about your investment horizon, financial goals and suitable asset allocation at Morningstar's Learning Centre.
Summing Up
In summary, our ISA Survey 2010 revealed that the vast majority of our readers are financially savvy and actively investing but it also threw up a few concerns around how investors go about making these important decisions. Time and time again, even seasoned investors are stumbling into common pitfalls. Meanwhile, of those who avoid these investing mistakes by avoiding investing full stop, it’s not necessarily a lack of funds that's holding them back but a lack of know-how and inclination that’s preventing them from reaping the benefits of ISAs. We'll be expanding on many of the themes raised by this sruvey in future articles. In the mean time, please do check out this article on how to get started in the world of investing, and use our archive and Learning Centre to find articles on all aspects of successful investing.
You can find the full results of our ISA Survey 2010 here.
