Investors have faced a white-knuckle ride on the global stock markets in 2022. Just as the FTSE recovered its pandemic losses, it was rocked by a stream of bad news. However, as hard as it is to see your ISA dip, stock markets have historically rebounded from downturns. According to Nasdaq.com, “Stocks rise and fall. Smart investors stay on the ride.”
During market uncertainty, Faith Glasgow from Interactive Investor believes that “a ‘buy and forget’ discipline really comes into its own.” She advises that “Selecting funds, investment trusts or ETFs for their long-term reliability and potential, and then simply not touching them for many years … means that you sidestep the temptation to panic and sell when volatility hits.”
I’m going to provide tips for a ‘buy and forget’ strategy for your ISA, together with five funds and trusts recommended by the experts.
[top_pitch]
Tips for a ‘buy and hold’ ISA strategy
A ‘hands-off’ approach can work well for younger investors with long-term investment horizons. It can also benefit higher-risk investing, offering superior returns in the long term but volatility in the short term.
Nick Wood from Quilter Cheviot believes this strategy “means investors are more resistant to all sorts of behavioural biases, not least the inclination to sell the weakest-performing funds and buy those doing better, which rarely ends well.”
Rory McPherson, head of investment strategy at Punter Southall, provides the following advice to ‘buy and hold’ ISA investors:
- Take a long-term view of at least 10 years.
- Pick the right fund manager. McPherson suggests finding “a manager who follows (and sticks to) a robust process that brings consistency to the returns pattern, as opposed to finding a ‘star’ manager whose performance is much harder to predict and will require more ruthless monitoring, and whose star might fall as quickly as it rose.”
- Continue to make ISA contributions “on the dips, as opposed to panicking (and selling) during times of uncertainty.”
- Choose accumulation rather than income share classes for ISA funds. Reinvesting dividends compounds growth.
How to create a ‘buy and forget’ ISA portfolio
The first choice is whether to invest your ISA in passive or actively-managed funds. Passive funds provide a low-cost way of tracking an equity index, without the risk of a fund manager underperforming.
Rob Burdett from BMO Global Asset Management advises that “if you are not interested in investment and/or don’t want to pay for advice, passives are a great way to gain exposure to stock markets on a buy and forget basis.”
According to Morningstar, only 25% of active funds have outperformed their tracker counterparts over a 10-year period. However, the top-performing UK active fund (CFP SDL UK Buffettology) delivered a 10-year return of over 250%, almost double the return of the top-performing passive fund (Xtrackers FTSE 250 UCITS ETF).
Faith Glasgow comments that “good active managers have the drive and facility to outperform their benchmark, but they can also take action to reduce losses in a falling market.” She adds that “Passive funds are specifically designed to follow the index and so there is nowhere to hide.”
Here are some of the active investments selected by the experts for a ‘buy and forget’ ISA portfolio.
1. City of London Trust
This investment trust was chosen by Nick Wood due to its “very stable investment process that the manager has not deviated from over many years.” According to Morningstar, it’s delivered an annualised return of 8.2% over the last 10 years with a dividend yield of 4.6%.
2. Artemis Income
Rory McPherson selected Artemis Income as it “follows a very clearly defined process that has made for consistency in performance even though elements of the team may change over time”. It’s delivered annual returns of 8.4% over the last decade, according to Morningstar, together with a yield of 3.6%.
3. Montanaro Better World
Dzmitry Lipski, head of fund research at Interactive Investor, picked the Montanaro Better World fund due to its highly-respected small-cap specialist managers. It’s an ESG fund and has achieved a three-year return of 54%, according to Trustnet.
4. FTF ClearBridge Global Infrastructure Income
Faith Glasgow recommends global listed infrastructure ISA funds as “inflation-proofed and structurally essential.” Rory McPherson selected this fund from Clearbridge. It’s a consistent top-quartile performer, with Trustnet reporting a five-year return of 65% and a 4.1% yield.
5. Personal Assets Trust (PAL)
Capital preservation investments aim to provide some upside while protecting capital in a downturn. Faith Glasgow suggests the Personal Assets Trust, which has delivered a five-year return of 32%, according to Trustnet. It made a modest loss of 5% in 2019 but otherwise achieved annual gains of 6%-12% in the last five years.
[middle_pitch]
What else do you need to know?
It’s important to monitor your ‘buy and forget’ ISA investments periodically in terms of manager changes, fees and performance. It’s also worth comparing fees between different ISA providers, which we’ve set out in our guide to top-rated ISA providers.
