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The 5 biggest ISA mistakes you need to avoid

It’s that magic day of 5 April, and our ISA allowance is rolling round to the new 2017-18 limit of £20,000. Whether you’re starting out with your first ISA or looking forward to adding a new year’s worth of investing to your existing total, there are some key mistakes you should avoid.

Shares, not cash

Around 75% of ISAs taken out each year are cash ISAs. Sure, it’s good to not pay tax on your savings interest, but in these days of super-low interest rates, the tax you’re saving is tiny compared to what you could be losing by not investing in shares. 

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If you invest in top FTSE 100 dividend-paying shares, it’s not hard to get yourself income of 4% to 5% or better from dividends alone, and over the long term you’re very likely to enjoy share price appreciation too — an investment in the FTSE 100 at inception in 1984 would have grown nearly sevenfold (plus dividends).

Do it now

Do you think “I’ve got all year to do it“? Or “I’m young, I can leave that ISA lark until I’m older“? Let’s assume a 40-year working life. Thanks to the miracle of compounding, £1,000 invested in your first year at an annual return of 6% would end up worth more than £10,000. But £1,000 invested five years before you retire would get you only £1,340. Early years of investing are worth far more than later years.

And if you keep putting off your start, you’ll be surprised how quickly the year comes round again, and you won’t have time (or the money) to make the most of your allowance.

Don’t over-trade

Charges for buying and selling shares are pretty low these days, but on a transaction of around £1,000 they can still amount to a couple of percent — proportionally less the bigger your trade. That might not sound like much, but it soon adds up, and if you spend the year making multiple buys and sells, especially at relatively low volumes, you’re likely to wipe out any benefits from investing in a Stocks & Shares ISA.

Warren Buffett famously said that if you wouldn’t hold a share for 10 years, you shouldn’t hold it for 10 minutes — and the fact that the vast majority of short-term traders lose money over the long term shows he’s right.

Get rich quick?

The biggest cause of over-trading is probably the desire to get rich quick, and that can be a fatal strategy when it comes to investing in shares. “What’s the next big flyer going to be?“, people often ask me when they find out what my job is, but the simple answer is that I have no idea. And neither does anyone else, beginner and expert alike.

No, if you follow the gambler’s mentality of always looking for a big win, you’ll almost certainly fail. The way to go is to see investing as becoming a part owner of a handful of great business, and seek out shares with great long-term potential.

Reinvest your dividends

I’ll finish with one of my favourite investing statistics. According to the Barclays Equity-Gilt study, if you’d invested £100 in the UK stock market in 1945 it would have grown to around £9,000 after adjusting for inflation — more than 90 times your original investment. But if you’d reinvested all your dividends in new shares too, you be sitting on an inflation-adjusted pot of around £180,000.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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