This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Tom Stevenson, investment director at Fidelity Worldwide Investment, provides six tips for ensuring you're no April Fool this tax year.
With the end of tax year deadline fast approaching, many savers may be planning to use the long weekend to make the most of their ISA allowance before it runs out. To coincide with April Fools Day, which falls on Easter Monday this year, Fidelity Worldwide Investment has highlighted six fool-proof tips for ISA investing to help investors make the most of their savings.
1) Don’t Put All Your Eggs in One Basket
Nothing could be truer when it comes to investing. Piling all your money into one asset class or into one geographical area can be very dangerous if markets fall. By rule of thumb, investors should spread their investments across multiple asset classes from equities to bonds and across different regions from the UK to Asia.
2) Don’t Leave It Too Late
The magic of compounding means that starting early can really make a difference as it gives your money more time to grow in the market over the long run. For example, if an individual started saving £100 a month from the age of 25 their pension pot at age 55 could be worth nearly £50,000* more than if they waited until they were 45** to start saving. This is illustrated by the below table.
3) Don’t Time the Markets
It is extremely hard to establish when is the best time to buy and sell shares and funds as the speed at which markets react to news means stock prices very quickly absorb the impact of new developments. This means investors who try to time their entry and exit are likely to miss the bounces. One way investors can avoid the temptation to time the markets is to set up a monthly savings plan--for example, you can invest from £50 a month into any fund on Fidelity's fund supermarket.
4) Don’t Underestimate the Effect of Inflation
There are a number of ways to shield your portfolio from the detrimental effects of rising inflation. For example, equities can provide a good hedge against rising prices in a modestly inflationary environment. This is because shares represent a real claim on a company's assets and cash flow which can rise in line with prices if a company has any pricing power.
5) Don’t Forget About Your Cash Savings
History tells us that the returns from stock market investing have been far superior to that from cash. Individuals with a medium to long-term investment time horizon should be considering stocks and shares, not least to benefit from better returns but also to protect their savings against the impact of inflation.
6) Don’t Just Rely on Past Performance
An important point to remember when it comes to investing is that past performance is not a guide to future performance. There are plenty of examples of stocks, sectors and indeed fund managers with strong track records subsequently disappointing investors. One of the main reasons why bonds have been the asset class of choice in the past three years has been investors' tendency to extrapolate the recent past into the future. By focusing on equity markets' "lost decade" between 2000 and 2010 many investors have missed out on the near doubling of the market since the low in March 2003.
