FOOL'S EYE VIEW
An ISA Is For Life, Not Just For Easter

By Stuart Watson (TMFTiger)
March 26, 2002

Sick of the ISA bombardment yet? It's easy to be cynical about the marketing machine going into overdrive this time of the year. It will all be over in a few weeks but, somewhat depressingly, it does seem like the majority of us need to given repeated, overbearing reminders before we decide to invest at all. In the last two years, over 35% of the money put into share ISAs has been in the months of March and April.

The industry has had to work even harder this year because of the lemming effect. When markets have gone up everyone is keen to get a piece of the action. When they have gone down, no one wants to know. You can see the dwindling interest in ISAs in this table that shows gross monthly sales of unit trust ISAs, since they were introduced three years ago.

                1999    2000    2001
                  £m      £m      £m
Jan                -     674     637
Feb                -   1,073     762
Mar                -   2,393   1,316
Apr              556   1,831   1,477
May              513     914     747
Jun              589     796     572
Jul              645     703     564
Aug              562     660     468
Sep              619     682     376
Oct              660     700     385
Nov              743     669     391
Dec              603     548     327
              ------  ------  ------
               5,490  11,643   8,022

Prior to 6 April 1999, the PEP regime was in effect and different investment limits applied. The difference between April 1999 and April 2000 shows how much of the April total is squeezed into the first five days of that month.

For completeness, it's worth pointing out that the latest monthly figures (for January 2002) showed gross sales of £380m. This was an increase from December but still 40% down on last year. More recent press reports have suggested that sales of ISAs are still down on last year by about the same amount. That's a worry. It's a well-known fact that most of us weren't saving enough before. So a further drop is bad news.

Ideally, the amount invested each month and each year would be more or less equal. Currently, we're putting in more when markets are higher and less when they're lower. This means that the average punter's investments will do worse than the average performance of the market over any given time frame. We're buying at the peaks and not buying (and probably even selling) in the troughs because our actions are predominantly governed by 'recent event syndrome'. Once again, as we're not investing enough anyway, this is an additional handicap we can ill afford.

Puppies!

Many people seem to expect their investments to spring into instant action. Just like the proverbial Christmas puppy, you can't just throw out your ISA after a few months. It's a long-term commitment of money, although you are, of course, free to change your ISA to a better breed if you really feel it won't deliver what you think are reasonable returns. But investments, just like puppies, will have their good days and their bad days. Face it, the puppy is going to decorate your carpet at some point. But you just can't tell in advance whether any particular day is going to be good or bad. So you have to take the rough with the smooth.

Likewise, predicting the short-term direction of the stock market is impossible and therefore completely and utterly pointless. The secret of investing is, ultimately, that there is no secret. The more you put in, the more you get out. The less is taken out of the equation by charges, the more you get out. The less you follow fads or go for devilishly complex products, the more you get out.

The final piece of the puzzle is whether it's worth rushing to invest in an ISA now or holding off in anticipation of lower prices further down the line. It's another impossible call. The £7,000 ISA allowance can save you a significant amount of tax in years to come, but the true benefits only really come apparent once you have several years of ISAs (and PEPs) under your belt. Our ISA Guide has a good example of just how much you can save. Given that investing in an ISA is often no more expensive than investing outside of one, it seems a shame to throw away the tax protection it offers. Just make a note not to leave it so late next year. Perhaps, just this once, the marketing men have got it right after all.

More: Find out how to get your free ISA guide | The ISA Centre