Understand ISA in principle but not practice.

LaughingMan

Hey all,

I've been reading lots about savings and investments but think I have reached the point where I need others advice.

I'm in my early 20's and can save about £900-1000 pm.

I know how I would do this with both cash ISA and regular savings accounts but I am happy to take on more risk via a S&S ISA and that's where I need advice.

Anybody can invest in bonds / gilts, ETFs, etc but for your first £11,000-ish you can have a tax wrapper via an ISA. This is where I get confused... I've read on the forum of advice for long term investments of 80% equity, could somebody explain this principle for me?

kind regards.

crittertog

LaughingMan wrote: »

I've read on the forum of advice for long term investments of 80% equity, could somebody explain this principle for me?

The rule of thumb used to be (100 - Age)% in equities, the rest in bonds (there's now an argument for 120-Age due to people living longer). This is because bonds/gilts are typically less volatile than equities, and are generally not correlated - this helps to smooth out the volatility of the portfolio, mitigating losses in one asset class, and helps to improve returns. Well, that's the idea.

CLAPTON

depends upon your general circumastances but at your age one would think of saving for a property deposit and starting a pension (especially if your employer contributes)

once you have a decent amount of savings then start looking at S&S ; firstly though why not start a 'fantasy' portfolio and see how you get on.

gadgetmind

LaughingMan wrote: »

I've read on the forum of advice for long term investments of 80% equity, could somebody explain this principle for me?

Over the long-term (multi-decades) equities provide a greater return with similar volatility to other asset classes. However, over shorter periods, they are much more volatile, which can freak people out. You therefore add less volatile assets both to reduce the "freak out factor" and if these assets also negatively correlate with equities, then you can get more return.

I suggest you read "Smarter Investing" by Tim Hale and perhaps also "The Intelligent Asset Allocator" by William Bernstein as these will give you a *very* good understanding of the subject.

I wish I'd read these books in my 20s and 30s, big time!

LaughingMan

A property deposit is essentially my motive for saving. My employer will - after I complete my training - contribute 5% providing I also contribute a minimum of 3%, however, I have over 18 months until I've finished my training. So no pension scheme initially.

So just to check I've understood the advice properly:

I'm going to max out my cash ISA asap, then use any leftover into a regular saver and on maturity of that account use it to top up the cash ISA even quicker than the year before.

In the mean time I'll start a fantasy S&S portfolio and read those recommended books.

If when the time comes I have more money to save/invest than cash ISA and regular savings accounts combined but don't feel comfortable using a S&S ISA where would be the next best option?

Also can anyone recommend a good fantasy S&S ISA?

CLAPTON

virtual every stockbroker service offers a fantasy portfolio service so you can buy and sell virtual shares
an example is

http://www.iii.co.uk/

mhuk01

I don't know the ins and outs of investing in stocks through an ISA (as my shares are US based as my job is paid in USD). However I can tell you that as long as you are willing to put the research into which shares to invest in, just because you are young don't be put off! I'm 23 and have been in the lucky position like yourself with a regular stream of money to put into savings & investments.
Always be cautious with where you put your money, but don't let anyone put you off stocks and shares just because they see them as more 'risky' than a savings account. Just look at it as savings accounts require no work to maintain, whereas an investment portfolio requires work to keep ticking over to get a reasonable return.