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5 top tips for your stocks and shares Isa

Points to consider as investment Isa sales soar
Piggy bank on books

Set yourself a time frame and financial goals before you begin investing

With interest rates on savings accounts still at a depressing low and failing to outstrip inflation, increasing numbers of savers turned to stocks and shares Individual Savings Accounts (Isas) in the past month, new figures suggest.

The Investment Management Association’s (IMA) latest statistics for March 2011, the month in which savers rush to take advantage of their remaining Isa limit, have shown that sales of stocks and shares Isa investment funds reached £1.9 billion.

Record sales in stocks and shares Isas

In fact, through 2010 and 2011, sales of Isa investments reach £3.7 billion, the second highest in the past decade, as savers turn to the stock markets to look for growth that can outstrip inflation.

Investors put £739 million into equity (investment in shares in companies) products, accounting for 38% of the £1.9 billion that was invested into stocks and shares Isas last month. A further £394 million was poured into bonds.

Five investment tips for your stocks and shares Isa

With this in mind, Which? gives you five top tips you should think about when investing your savings into a stocks and shares Isa.

1) Should you really be investing in the first place?

Many people invest without taking into consideration more important factors, like repaying debt, getting insured, saving for retirement and building up and emergency fund of savings. You must ensure you have prioritised these before putting any of your money at risk. Learn more about this in our beginner’s guide to investment.

2) Understand your attitude to risk and capacity for loss

Would you be able to sleep at night if your savings dropped by 30% over a short period of time? Can you afford to lose any of the money that you’re investing? Understanding what your appetite for taking on risk and how much you can realistically afford to lose is integral to picking the right investments. The timeframe you have to meet your goals is also important – if you have less than five years to invest, you should really stick to savings. Read our guide to investment risk for more on this.

3) Diversify your investments

It’s said that there’s only one free lunch in investment and that’s diversification. This is the process of investing in different assets to spread risk around. If you were totally invested in equities, and the equity markets crashed, all of your money would be exposed to this fall. By spreading it around, you can smooth out your returns and add layers of protection to your money. We’ve explained this further in our five step guide to diversification.

4) Watch out for costs

Investment funds, like unit trusts and OEICs, charge an annual fee for looking after your money. Those that are run by a investment manager, who makes investment decisions on your behalf, charge more but these fees can be the biggest drag on the performance of your investments, with no guarantees that the expertise you’re paying for will deliver. Consider passive investments, like tracker funds and exchange traded funds (ETFs), which are a good entry to the stock market and much cheaper. Also, use fund supermarkets to cut costs if you’re investing without taking financial advice.

5) Drip feed your investments

You may have a lump sum that you want to invest, but if you invest all in one go and your investment drops, all of your money is exposed. By drip feeding your money on a monthly basis, you can smooth out the highs and lows of the market and may end up making more money. This process is called pound cost averaging and can be a sensible way to start investing.

Remember, you can invest up to £10,680 into a stocks and shares Isa. We always recommend that you seek independent financial advice when thinking about investing your money.

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