You can tell it must be November. The shops are already stocking Christmas stuff, and Motley Fool writers are already banging on about planning your 2020 ISA.
It’s something many savers and investors leave to the last minute but, before I talk about the reasons for good planning, I want to deal with one particular bugbear of mine.
I’m talking about the Cash ISA. Putting money into a one, when they’re offering below-inflation interest rates of only around 1.45%, is a guaranteed way to lose money in real terms. Every time I look at the stats, it saddens me to recall that 7.8m adults in the UK put £39.8bn into Cash ISAs in the 2017-2018 year.
Pleasing shift
Still, the proportion of ISA money going into Stocks and Shares ISAs is gradually increasing, and that pleases me. The FTSE 100 is on a forecast dividend yield of 4.8%, more than three times Cash ISA interest. And if you select higher dividend stocks, you should be able to put together a portfolio yielding an overall 5-6% fairly easily.
I can understand people being wary of share price falls, but I reckon today’s high dividends provide a two-fold safety net. One is that the cash itself can provide a great income, regardless of where share prices go in the short term (and if you’re investing for the long term, why worry about the next year or two anyway?)
The other is that I see high dividend yields as an indicator of low share prices. I think that suggests the outlook for Footsie shares is even better than usual.
Planning
The biggest benefit of early planning for next year’s ISA, in my view, is that it can spur us to make the most of this year’s allowance. Now I know very few people can invest the full £20,000 per year, but could you set aside an extra £100 per month between now and the deadline to help secure your future? And maybe occasionally up it to £200? An extra £1,000 invested this year in your current ISA could make a significant difference over the course of a few decades.
According to a long-term study by Barclays, UK shares have returned an average of 4.9% above inflation over the long term.
If you have, say, 30 years to go before you retire, a £1,000 investment in UK shares today at 4.9%, with all income reinvested, would more than quadruple in value to £4,200 — and remember, that’s even after inflation. And even if you’re a lot closer to retirement, even after 10 years, a £1,000 investment would have turned into £1,600, again after inflation.
What to buy?
As we head into winter, I think this is a good time to start looking back on the performance of our ISAs over the past few years, examining our strategy, and thinking about how best to invest for the long term. One good thing I think has come from the past few years of Brexit chaos is that a lot of people have re-evaluated their approach to investment.
I’m seeing more focus these days on safer, globally-diversified companies and on reliable and well-covered dividends. And that, for me, is the perfect ISA strategy.