How can experienced investors manage volatility with their ISA investments?

By Jo Bentham20th August 2021

Experienced investors know that fluctuations are to be expected when investing into equities – but following the worst market crash post-global financial crisis, induced by the ripple effect of Coronavirus, it’s unsurprising that some are becoming more disillusioned with their volatile nature.

Article main image

In the week beginning 24th February 2020, the then-emerging Coronavirus pandemic caused the Dow Jones and S&P 500 to suffer their biggest falls since 2008, with the former declining 11% and the latter 12%. 

Then on 12th March 2020, the Dow Jones experienced its steepest one-day drop since 1987’s Black Monday, falling 9.99%. 

And though markets began to return to their pre-pandemic peaks in the months following, investors are still witnessing severe fluctuations 18 months after the initial crash. In just one example, the FTSE 100 saw £50 billion wiped off share values on 19th August 2021 amidst fears surrounding Covid-19 variants. 

For experienced investors observing the impact of these fluctuations on their Stocks and Shares ISA, there are some high level options to consider – including waiting for falls in value to recover over the long-term, and diversifying within the ISA wrapper to create a balanced portfolio. 

Some investors may also choose to sell their more volatile equities, instead opting for stocks that have performed better than most during the Coronavirus crisis such as supermarkets and pharmaceuticals, or leaving the market behind altogether. 

But the potential long-term growth of stocks and shares makes short-term volatility bearable for a lot of experienced investors. For these, the addition of alternative ISA products to their portfolio which are uncorrelated to the market’s fluctuations – such as a property-backed Innovative Finance ISA (IFISA) – could be a crucial consideration for maximising returns and mitigating risk.

 

Diversifying with a property-backed IFISA

Though the Cash ISA has its place in the ISA market for investors wanting instant-access, Financial Services Compensation Scheme (FSCS)-protected cash savings, interest rates are at rock-bottom and failing to keep pace with inflation

Research from NextGen Cloud – focused on investors in the UK with a portfolio worth in excess of £10,000 – found that 43% are now more inclined to consider alternative investments due to the impacts of Covid-19, in particular the current low interest environment. 

And the IFISA was introduced to the ISA market in April 2016 to enable experienced investors to invest into alternative investments – namely peer-to-peer loans and debt-based securities – whilst also benefiting from the ISA wrapper’s tax-free returns. 

Therefore, experienced investors looking for an ISA with the potential for significant capital growth without the volatility of a Stocks and Shares ISA could find an IFISA most appropriate. 

With a variety of assets accessible within the IFISA, one that could be particularly beneficial for diversification at present is property bonds, as the UK’s housing market has evidenced significant resilience throughout the pandemic, accelerating at record-breaking levels. 

After decades of undersupplied demand – and as the latest Zoopla House Price Index reports that the increase in sales over the last 12 months has further eroded supply, with the total stock of homes for sale down 26% on 2020 – it’s more vital than ever that, supported by alternative finance, small and medium-sized housebuilders are able to aid their regional counterparts in tackling the UK’s housing shortage.

And with most property bonds offered on a fixed-term basis – often between two and five years – with a set target rate of return typically ranging from 4% to 8% that can often be realised quarterly or upon maturity, they can be effective in adding more structure to a portfolio weighted heavily towards fluctuating equities. 

As many experienced investors begin to rethink their traditional 60:40 stocks to bonds portfolio in the midst of these evidenced intense fluctuations and all-time low interest rates, property bonds could be a middle-ground consideration for supplementing the likes of low-yielding Government bonds whilst balancing out the volatility of stocks. 

But keep in mind, though less volatile than a Stocks and Shares ISA, the property-backed IFISA is still an investment product and property bonds are higher-risk than low-risk Government bonds. It’s imperative to seek independent advice before investing.

 

Managing volatility by diversifying within the ISA wrapper

With an annual ISA allowance that enables experienced investors to subscribe funds to multiple ISA products, there are methods of managing and balancing the increased volatility most have likely witnessed with their Stocks and Shares ISA as of late. 

Whether opting to ride out these fluctuations for the potential of long-term growth or looking to move away from the Stocks and Shares ISA altogether, experienced investors could find the property-backed IFISA’s fixed-term, set target rate an attractive option. 

And as demand for the alternative finance provided by property bonds is unlikely to diminish even after the post-lockdown surge evens out – due to decades of undersupply creating an ongoing housing crisis – they continue to be a particularly resilient asset.