This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Nick Blake, head of retail at Vanguard Asset Management, explains why so-called 'ISA season' should be an all-year event.
Instead of picking funds once a year, investors and their advisers should consider four basic investment principles that Vanguard believes are likely to give them the best chance of investment success. Vanguard encourages advisers and investors to focus on those things within their control, including:
- Creating clear, appropriate investment goals
- Developing a suitable asset allocation using broadly diversified funds
- Minimising cost
- Maintaining perspective and long-term discipline
It can be tempting during ISA season to look at what’s performing well and invest your ISA allowance into it without further thought. But we think there’s a better way to invest. Rather than getting swept away with the April ‘ISA season’, the first thing investors and their advisers should do is to set sensible financial goals--then, once you know where you’re going, you can decide the best route to take.
Instead of picking funds based on short-term performance or marketing, investors should consider their goals and how much financial risk they are willing and able to take. With a goal and risk profile at the centre, investors, with their advisers’ help, can build a suitable asset allocation to help them achieve their goal.
Costs are another key factor in whether or not an investor achieves their goal. Ignoring the costs of the underlying funds in an ISA can be painful and can even eradicate the tax benefit of ISA investing. The more an investor pays out in fees, the less of their money is being put to work in the markets. By their nature, the markets are changeable and carry risks.
Vanguard’s data (shown in the table below) illustrate the effect of fees on an investor with the full 2012/13 ISA contribution of £11,280. Over the long term, by which I mean thirty years, the investor in the fund with ongoing charges of 1.5% per annum pays over £9,600 in fees more than the investor in fund with ongoing charges of 0.5%. That’s a significant proportion of the original investment!
Source: Vanguard Asset Management 2013.
Assumes a 5% nominal annual return and 0.5% inflation, i.e. a 4.5% real annual return.
This is a hypothetical example and does not relate to any particular portfolio.
No one can control or predict what happens in the markets and it can be tempting to tinker with a portfolio based on short-term performance. But, although everyone should regularly review their portfolio with their adviser, changing allocations on a whim is rarely a route to investment success.
Sticking to a pre-agreed investment plan requires discipline. Funds should be regularly rebalanced so that they stay in line with the investor's goal and willingness to take risk.
For example, during a strong period of performance from equities, the weighting in equities will rise if left unchecked. This may leave the portfolio with more risk than intended. It can be hard to swap from a high-performing asset class into one that has lagged, but we believe that maintaining the correct asset allocation is crucial.
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