Happy New Year! Not many people get excited about the new tax year which starts today, 6 April. There are no hangovers, no Auld Lang Syne ringing in the ears, just a raft of tax changes. However, investors do have something to celebrate, in the shape of their brand-new £20,000 tax-free ISA allowance for 2018/19.
If you are serious about investing, it helps to have the taxman off your back. As my Foolish colleague Peter Stephens points out, you can make a million from ISAs in 23 years. If you are investing over your working lifetime, which could be as long as 40 years (I don’t mean to depress you), you could end up with a lot more than that.
Investors have traditionally rushed to use their allowance in the final weeks of the tax year, a period known as the ISA season, but once that deadline passes most forget all about ISAs for another year, which is a costly mistake. Early bird investors are the ones who really catch the return, new research from Hargreaves Lansdown shows.
Invest early, invest often
Somebody who invested their full ISA allowance at the start of each tax year for the last decade will have almost £20,000 more than someone who waited until the last minute. These figures assume you bought the Legal & General International Index fund, which would have turned your money into £221,500. Last-minute investors would have just £202,500.
That is partly because your money has had longer to grow, but also, crucially, because you pocket an extra 12 months of dividends each year. Right now, the FTSE 100 yields 4.1%. If you are lucky enough to have £20,000 spare and put it into, say, an exchange traded fund (ETF) tracking the FTSE 100, you will earn £820 in dividends alone over the next 12 months. If you reinvested that, you will end up with more stock as a result.
Few of us have £20,000 at our fingertips, but there is another option. Today is also the ideal time to set up a monthly savings plan. In fact, I would argue that is the best way to invest in today’s volatile market, as it avoids the horror of paying in a large cash sum today, only to see markets crash tomorrow.
You actually turn market volatility to your advantage, thanks to the wonder of pound cost averaging. If you invest a fixed sum every month, you pick up more stock when markets have fallen, then benefit when prices recover. This also avoids the agony of trying to time the markets.
Down means up
Here’s a good example. If you have £1,200 to invest and buy a stock trading at £5, you will get 240 shares. If you make regular monthly investments of £100, and the share price is £5 for six months, then dips to £4 for three months and rebounds to £6 for the last two months, your £1,200 will have bought 253 shares. Every little helps.
The sooner you start building your ISA fortune, the better. These two investment trusts could be a good place to start. And there is no better time than today.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.