New comer to ISAs... advice required

etones

Hi all, new to ISAs and have some questions.

I'd like to begin investing some or all of my £7k allowance each year, £3k in mini cash ISAs and some or all of the remainder in an index tracker.

FYI, im 22.

Now, for the mini cash ISA part, do they work in the same way as a typical savings account where interest it applied pro-rota? Or, if I was to open a mini cash ISA in say March 07 and put in £3k, would I still get the full 5% (or whatever) interest?

Question 2: in the following year do I open a new mini cash ISA or just move funds into the one I have open? Does compound interest apply to mini cash ISAs? Im presuming yes, in this case, is it better to keep your funds within a single cash ISA or is it ok to spread them across different banks/BSs depending on who has the best interest rate at the time?

Is it possible to transfer a cash ISA, i.e. lets say my bank drops there rate to 4%, can i switch to a bank with a better rate? Do penalties apply?

Thanks for all your help! Please, if i am missing the point totally or you feel you have good advice, please do tell me

THANK YOU.

With kind regards,
Taz

dunstonh

Interest is calculated from the day you put it in. Most cash ISAs can be transferred without penalty although its always worth making sure first (same with equity ISAs).

On the investment front, which indexes do you intend to track?

etones

dunstonh wrote:

Interest is calculated from the day you put it in. Most cash ISAs can be transferred without penalty although its always worth making sure first (same with equity ISAs).

On the investment front, which indexes do you intend to track?

Thanks for the reply. So its advisable to get yout max £3k allowance in as early as possible?

In terms of a tracker, based on the Advice from the fool.co.uk, I was looking at the FTSE 100. Is there further advice on this front?

Thanks again,
Taz

dunstonh

Thanks for the reply. So its advisable to get yout max £3k allowance in as early as possible?

Yes.

In terms of a tracker, based on the Advice from the fool.co.uk, I was looking at the FTSE 100. Is there further advice on this front?

Hmm. Your choice I guess.

That is the same FTSE100 tracker than has underperformed most UK stockmarket funds over the last 6 years to the point that you would barely have got your money back had you invested in 2000/2001.

You need to understand the pros and cons of trackers (and managed funds) and realise that charges are not everything. If you had invested £4000 in May 2001, you would now have around £4300 with a FTSE100 tracker. If you had invested into a 250 tracker you would have £8070.

So, if you had done this 5 years ago, you would have made nothing. If you had picked a mangaged equity income fund, you would have around £7000 and if you had picked the best tracker, you would have had £8000.

You dont put all your eggs into one basket. Out of the 10 major investment sectors (each having smaller sub-sectors) offering around 7000 open unit trust/oeic funds, you want to put all your money into one fund. Therefore giving you a 1 in 7000 chance of being in the best place.

The UK is also overated as a sector. Its best performing sector around once every 7 years or so. So, in 15 years, you will be lucky twice.

Also, as its your first dip into equity funds, you are jumping in with a medium/high risk fund. Why not go into a spread of funds with perhaps 4 funds from different risk profiles and see how you get on?

Sillychuckie

I am in a similar position but have a slight head start (in that I have already used up the 3k cash allowance).
It wont be another month until I start work that I'll have the excess funds to fund the 4k equity part of the ISA.

dunstonh wrote:

Why not go into a spread of funds with perhaps 4 funds from different risk profiles and see how you get on?

What provider do you recommend to go to to open an equity ISA right now that could enable me to spread my investment amongst different profiles etc?
I dont really know what provider to go to (some charge, some don't), I don't feel confident enough to pick my own investments (nor do I have the time), and I have no idea which funds would be good ones to invest in.
I know you aren't allowed to give specific fund advice, but I need more than a push in the right direction.
Also, if 'drip feeding' it (e.g. with £250 each month) is a good approach, then I could easily start that immediately rather than waiting till I start back at work.

At the moment alot of my interest is being taxed, so would be good to get it all sorted to be honest. Any specific suggestions are welcome.
I'm not one willing to be too risky (I'd like to be sure my initial investment is safe) but I'm prepared to tie the funds up for 10 years or so (so long as the interest earned remain tax free).

Thanks.

dunstonh

What provider do you recommend to go to to open an equity ISA right now that could enable me to spread my investment amongst different profiles etc?

We cannot make recommendations of that sort on the board. It is against board rules as it could be classed as regulated financial advice. Especially coming from an IFA. However, look up fund Martins article on investing in ISAs and he lists a few of the discount brokers. Alternatively, you could seek independent advice.

I dont really know what provider to go to (some charge, some don't), I don't feel confident enough to pick my own investments (nor do I have the time), and I have no idea which funds would be good ones to invest in.

This is what an IFA is for. It isnt that expensive to use an IFA. Whilst commission on ISAs is usually 3% of the amount you invest (so on £4000, that would be £120), the FSA published figures show 1.5% is the average taken making it £60.

Also, if 'drip feeding' it (e.g. with £250 each month) is a good approach, then I could easily start that immediately rather than waiting till I start back at work.

If you did it last year, then no. If you did it this year, then yes. What will it be in the years ahead? no-one can know the answer. At this moment, probably getting it straight in is best.

I'm not one willing to be too risky (I'd like to be sure my initial investment is safe) but I'm prepared to tie the funds up for 10 years or so (so long as the interest earned remain tax free).

Remember not to say interest. The investment funds you use do not pay interest (with a few exceptions). Risk is important to consider. You need to think about how much of a drop you would take before getting cold feet and then make sure that the investment funds you choose are of the type that would not typically suffer that sort of drop. Again, if you want to pick the funds for your risk profile or would have difficulties doing so, this is what the IFA would do.

Sillychuckie

OK, thanks..
I'll have to read more into the articles but if I'm still not 100% confident, I guess an IFA is the way to go.
I don't like the idea of paying for the service, but I guess money spent well (on good advice) isn't a bad thing or a waste.
Perhaps I'll try myself first but just invest a little less until I get some confidence in it all, provided it doesn't take too much time to manage.
I'll probably be back with more specific questions later with regards to the different forms of holdings etc.
Thanks again.

cheerfulcat

That is the same FTSE100 tracker than has underperformed most UK stockmarket funds over the last 6 years to the point that you would barely have got your money back had you invested in 2000/2001.

£1000 invested in the FTSE 100 10 years ago would be worth £2134. The average UK Equity fund return over the same time is £2098. 80% of managed funds underperform their index. Trackers are excellent vehicles for people who just want exposure to the stock market, especially if they are making regular investments.

Sillychuckie

Its confusing enough already.
Having IFA's and apparently well informed MSE'ers disagreeing doesn't make it any easier. I guess there are no right or wrong answers (unless you have a time machine).
I just don't want to risk loosing anything to be honest. A stock market crash could mean I lose my money right?

I think I'll try to drip feed a tracker but not sure what index yet. Perhaps both the 100 and 250. Just need to decide on which provider now.
BUT, if I fill up my 4k allowance each year there will 40k invested when I reach the 10 year mark. I wouldn't want to lose it all if there was a big crash. Maybe I'm better to just stick with savings accounts (and paying tax on them) and making the most out of mini cash ISA's and pensions for tax relief.

cheerfulcat

Hi, Sillychuckie,

If you make regular investments into funds or a portfolio of individual shares the chances of losing the lot in a single crash are very slim. Pound cost averaging over time means that you will be buying at all different prices, sometimes low, sometimes high. Over ten years you will almost certainly make money and it is pretty unlikely that you will lose everything.

Having IFA's and apparently well informed MSE'ers disagreeing doesn't make it any easier. I guess there are no right or wrong answers (unless you have a time machine).

I did not wish to confuse you further, simply to correct dh's assertion. To clarify - most managed funds are benchmarked to an index, the managers are discouraged from outperformance. Thus the funds more or less track the index ( " closet trackers " ), minus fees. You would be better off in most cases in an honest tracker. There are funds whose managers are given a free hand, and some of those will give fantastic returns as there are some really gifted investors - it's a matter of finding them... There are other funds which, while they are still closet trackers, track an index, such as commodities, which might be difficult to gain exposure to otherwise - these can be useful.

HTH

Cheerfulcat

You might like to read this post by a fund manager; it might give you a better idea of what goes on.

Hereward

Sillychuckie wrote:

I just don't want to risk loosing anything to be honest. A stock market crash could mean I lose my money right?

It all depends on how quickly you need to realise your investment after the crash: you would only lose money if you sold your shares immediately after a crash. In theory, if you held onto your shares you would eventually get your money back, and probably make a profit.

I think I'll try to drip feed a tracker but not sure what index yet. Perhaps both the 100 and 250. Just need to decide on which provider now.
BUT, if I fill up my 4k allowance each year there will 40k invested when I reach the 10 year mark. I wouldn't want to lose it all if there was a big crash. Maybe I'm better to just stick with savings accounts (and paying tax on them) and making the most out of mini cash ISA's and pensions for tax relief.

If you are completely risk adverse this would be the best solution for you. Just don't forget that most pensions have some exposure to the stock markets.