Just as people did, the global markets and various savings and investment products reacted to the Coronavirus pandemic – with severe fluctuations and rock-bottom interest rates often resulting in ISA savers and investors achieving either a loss or much lower gain than once expected.
This has served to reaffirm an existing principle of investing – diversification is crucial.
And though one of the most vital aspects, building a diversified portfolio is not just about exposing yourself to a range of assets in order to spread risk, it’s also about tackling different investment goals and timeframes.
The good news is that developing a diversified ISA portfolio is more than possible. With opportunities to hold and subscribe to as many ISAs as you would like, as well as multiple accounts to choose from offering differing risk–return profiles and asset options, giving consideration to investing into more than one ISA is vital to maximising returns and minimising risk.
Exposing yourself to a range of assets is key
All experienced investors will be aware that there are risks involved when investing; there are no guarantees that target returns will be generated or that the initial capital will be returned.
Whilst it’s impossible to avoid these risks entirely, holding a variation of assets within an ISA portfolio is an important method of mitigating risk to some degree.
With four main Adult ISA accounts to choose from – allowing access to the stock market, peer-to-peer loans and debt-based securities, and the somewhat safe asset of cash – and a tax-free annual ISA allowance available to subscribe, building a diversified ISA portfolio is key.
Each ISA and its underlying asset has its place in the market, and when put together within a personal portfolio, they can help to provide balance – especially during times of uncertainty.
For experienced investors, the Stocks and Shares ISA will likely be a favourite. It targets a potential return in excess of 4%, and though volatile with fluctuations to be expected, can often prove to be a valuable investment option in the long-term.
But the uncertainty of Coronavirus proved that the fluctuating nature of the stock market can be unpredictable.
Between 31st December 2019 and 30th June 2020, previously strong companies such as Cineworld Group and Royal Caribbean Cruises had some of the worst performing stocks – somewhat unsurprisingly during a time when non-essential services were closed and holidays cancelled around the world as countries were plunged into lockdown.
And for more cautious savers, even the Cash ISA suffered the effects of the uncertainty. Though interest rates have been low for many years, they hit rock-bottom in March 2020 when the Bank of England dropped their base rate to 0.1% – the lowest on record – with the potential for negative interest rates even being a possibility.
Whilst there were evidently few sectors unscathed by the global pandemic, some did perform better than others. One of these was property – a sector experienced investors can access through one of the newest members of the ISA family, the Innovative Finance ISA (IFISA).
The housing market boomed after the first lockdown in the UK, as people re-evaluated their living situations and looked for larger homes with gardens. And this strong growth continued – and is still continuing – proving that the need and desire for homes is more present than ever before.
Different ISAs can meet different investment timescales
When making investment decisions, it’s important to keep in mind timescales. When will you need access to your funds? Are you able to lock them away for the long-term, or do you need easy-access?
Chances are, you will have different timescales for different things. For example, you might – and should – want to put some funds into an easy-access savings account so you can access them quickly in the event of an emergency or particularly short-term goal.
But for other goals, such as investing for retirement, you could lock your money away for the medium to long-term, and in return, you could potentially receive a higher rate of return.
This is another way the ability to hold multiple ISAs can be extremely beneficial. Of the three core ISAs, a Cash ISA – as long as it’s easy-access – is useful for those short-term goals. Though your funds will take a considerably longer time to grow in value in a Cash ISA than in an investment ISA, the initial capital is always there to dip into as and when is needed.
On the other hand, an IFISA is considered medium-term. Most IFISAs are fixed term, meaning you can’t access your funds until the end of the agreed period of time, which is typically between two and five years. But where you are looking to target capital growth - by incorporating a greater level of risk into your portfolio - over the course of several years, it can be the ideal consideration.
But with a Stocks and Shares ISA, due to the volatility of the stock market, it’s recommended that you stay invested for a minimum of five years – but the longer the better, as this gives any falls in value time to recover.
Of course, all investments come with risk and with the exception of your funds within a Cash ISA, your capital is at risk and returns aren’t guaranteed. Though this itself shows the opportunities that exist within the ISA wrapper.
Diversifying your portfolio within the ISA wrapper
For experienced investors with the appropriate risk profiles, all three ISAs in your portfolio in order can directly aid in meeting differing investment goals with differing timescales.
Whilst new investments within the ISA wrapper are restricted to the annual ISA allowance of £20,000 (as of the 2021/22 tax year), you can have full flexibility and control over your investments through ISA transfers.
As a result, not only can you invest in more than one ISA each tax year to immediately diversify your investment portfolio, but you can adjust the weighting of your ISA investments continually over time to ensure your exposure to different assets within the ISA wrapper remains correct for your portfolio requirements at all times.