Drip Feed Your ISA.
Since last July, the ISA rules were almost completely relaxed. There is still a limit you can save in an ISA – £15,240 from 6 April 2015 – but you now get to choose how you split this between stocks & shares ISA and cash ISA, or all cash or all stocks and shares. This article looks at one of the problems that might arise if you invest all of your allowance in one go in a stocks and shares ISA. Such a problem arises if the stock market falls the month after you invest all your allowance in one stocks and shares ISA in one go. In these circumstances you could take quite a big hit. Unfortunately, investors wait until the last minute (end of March) to buy stocks and shares and this can sometimes be just the wrong time.
What is drip feeding?
Put simply, it means not investing all of your ISA allowance into a stocks and shares ISA at the same time, but drip feeding it in gradually over time. Using this strategy, if the stock market has dropped in month one, then you will only take a hit on your (smaller) initial investment; whilst in month two of the falling market, you will be buying in at a much better value for the percentage of your ISA you invest in this month.
Such a strategy allows you to spread your risk. You still use your whole ISA allowance for the current tax year but not all at once at the same time. This is a good strategy in the recent stock market conditions in the UK when the stock market has been high for quite a while, now dipped, with investors worrying about timing.
Investing in a stocks and shares ISA on a regular basis such as this, can be done using a regular direct debit or by making a lump sum investment and the ISA provider does the monthly investing for you on the same day of the month until the lump sum is totally invested. This is a good way of addressing any concerns you might have about whether the stock market is at the right level to invest. In other words, such a drip feeding strategy is likely to smooth out markets when they are too high or too low. This is called pound cost averaging.
Contact us for Advice on Drip Feeding Your ISA
As ever, there is always a potential down side to such a strategy, although in this case it’s more of an opportunity cost than a real loss. This is because by drip feeding your cash into a Stocks and Shares ISA, then you are probably holding the balance of your allowance in cash in a low interest bearing current or deposit account for example, waiting for the right time to invest. If the market then goes up before you invest you’ll potentially lose out on any gains you would have had by investing all of it, up front, at the same time.
As with all things relating to savings and pensions, finding what is right for you and your circumstances is what we do best, here at PML Financial Services. So if you’re considering drip feeding your ISA allowance, call us on 0121 693 0690, or contact us for an initial free, no obligation, chat.
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