In recent weeks, markets have crashed worldwide. And volatility has reached new highs. Yet seasoned investors realise that market corrections are a normal symptom of a healthy bull market. And sooner or later, shares of quality companies bounce back.
Therefore, today I’d like to take a step away from all the financial doom-and-gloom headlines that are inevitably be affecting the mood of the average British investor and remind our readers that savvy investors keep a clear focus on their financial goals. Investing decisions we make during a choppy period or a bear market are likely to have a substantial effect on our wealth in future years.
Putting money towards future goals
One big decision is what type of investment vehicle to use. I like ISAs as they offer tax-efficient benefits. Thus I believe every UK resident should learn more about the different types of ISAs available to them, with an emphasis on Stocks and Shares ISAs.
Currently, there’s a maximum subscription allowance of £20,000 per adult per tax year. Individuals can divide this in across a Cash ISA, a Stocks and Shares ISA, a Lifetime ISA (maximum of £4,000) or an Innovative Finance ISA.
Which one to choose? Well, over the past few days we’ve seen several central banks around the world cut interest rates in response to the coronavirus. It would not be wrong to conclude that the race to zero interest rates is on.
A low-interest-rate environment isn’t kind to savers. And easy-access Cash ISA rates are currently below 1.5%.
Although cash has its place in portfolios, it’s probably not ideal to hoard huge amounts of cash. I wouldn’t rely on cash savings to produce a rising passive income in retirement years.
Therefore, I’d encourage our readers to learn more about the potential benefits of maximising their savings in a Stocks and Shares ISA.
Making the most out of the allowance
Individuals can usually invest in three ways:
a) With a lump sum only, from a year-end bonus, for example. This method gives the portfolio a longer time for growth during the year.
b) For those with irregular income, an initial lump sum, followed by top-up payments works best.
c) With regular (usually monthly) payments, which can be set up automatically by direct debit.
My personal experience is that regular investing helps me stay more disciplined and patient. It may also give anyone the stamina to stick it out in the tough or volatile times.
Where to invest
There’s a wide range of investment options available for a Stocks and Shares ISA.
You could invest directly in FTSE 100 or FTSE 250 shares. Both indices offer the possibility of investing in a range of dividend-paying stocks, such as Aviva, Barclays, Bellway, Britvic, Centamin, Diageo, GlaxoSmithKline, National Grid, Persimmon, Tate & Lyle or WPP. The recent market crash has boosted dividend yields of many shares. And any capital gains delivered by the stock would be an added bonus on top of the dividend.
Another option could be to invest in low-cost exchange-traded funds (ETFs). If you’re interested in dividend stocks, then the iShares UK Dividend UCITS ETF may be a possibility.
Buying during a market free-fall takes courage. But history suggests that investing in quality shares after recent declines can also result in substantial returns over the long haul.
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tezcang has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Britvic and GlaxoSmithKline. The Motley Fool UK has recommended Barclays and Diageo. 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.