FOOL'S EYE VIEW
Beat The ISA Rush

By James Carlisle
January 7, 2002

There's an old Spanish proverb that says 'tomorrow is often the busiest day of the week' and it seems to sum up most people's attitude to their finances quite well. The trouble is that we're often not entirely comfortable with what we should be doing, where money is concerned and, where we don't feel entirely comfortable, 'manăna' is an especially attractive option. After all, if we leave something alone, there's at least the chance that it might go away.

The end of the tax year, however, won't go away. It's there on April 5th and procrastinators will soon find that the deadline for their 2001/2 ISA allowance is fast approaching. Fund management companies, of course, are fully aware of this fact. So, for the next few months, you should notice a general increase in the level of ISA advertising until it reaches a crescendo in March.

It's a valid point as well. Shares make the best home for long-term investments and it makes sense to invest in them, as far as possible, via a tax-protected vehicle like an ISA or pension (and preferably one with low charges). But what's the problem? So long as you get the thing done by 5th April, that's OK, isn't it?

Unfortunately not. It's not like doing the washing up before your other half gets home and it's not like putting that picture up before your parents come to stay. It actually matters when you invest in your ISA. Or at least it might matter, which is enough reason to approach the matter seriously. The reason it might matter is that, with investing, it's best not to follow the herd.

When people invest money in stock market ISAs, then (to a greater or lesser extent depending on the type of ISA) the manager of the ISA has to go to the stock market and invest that money in shares. The more people are putting money into ISAs, then the more fund managers are investing money in shares. That would tend to increase the demand for shares, potentially increasing their price. So, if you tend to buy shares at the same time as everyone else, then you may well be paying more for them than otherwise. Paying more for them will reduce your long-term returns.

You can see some of this in action by looking at AUTIF's figures for unit trust sales (unit trusts are mostly what goes into share-based ISAs). AUTIF are the industry body for investment funds and, every year, their figures show a sharp rise in March and April. The effect was even there in 2001, when investing in shares was hardly the fashionable thing to be doing.

It's harder to spot the effect of this on share prices. I spent this morning fiddling with data for the FTSE All Share index, but the upshot is inconclusive. Sometimes there looks like a bit of a jump in March, but sometimes there doesn't. The trouble is that there are so many factors driving share prices. It might be, for instance, that prices fall around the end of the tax year, but fall by less than they would have done if it wasn't for the effect of ISAs (and before them, PEPs). Since they're a relatively recent phenomenon, there aren't really enough years to study.

The stock market also tends to do a pretty good job at seeing things coming. If it expects prices to go up in March because of ISA sales, then investors will buy in February, sending up prices ahead of events. If the market sees prices rising in February, then prices will go up in January. And so on, until you really can't be sure about when they'll go up (and, of course, down).

Still, you can't really get away from the fact that there's likely to be more money than usual flowing into shares during 'ISA season'. That, in itself, is enough to raise warning signs. The solution is pretty straightforward: don't wait until the end of the tax year to get your ISA!

That's the easy part, but it would be more useful to know when exactly was the best time to be buying your ISA. Unfortunately, I can't help you much with that. But you can take a great stride forward by recognising that neither can anyone else, whatever they'd like you to believe. A market is made of opinions and, by its nature, the opinions will be finely balanced. You just can't 'time' your entries and exits from the stock market.

What we can say, though, is that shares tend to be the best home for long-term investments. On that basis, we should be investing our money in shares (and therefore ISAs) as soon as we have it earmarked for the long-term. For most people, the money will become available on a monthly basis out of their income, so the most sensible approach to long-term investment is to make regular monthly contributions to an ISA via a standing order.

More: Visit the Fool's ISA Centre to help decide which ISA is right for you.