With the new £20,000 ISA allowance just round the corner, it could pay to clear up a few misunderstandings.
1: You can’t take money out
If we put cash into an ISA and then take it out, do we lose that part of our allowance? Actually, some providers are more flexible with their Stocks and Shares ISA offerings.
Suppose we pay in £5,000. Then we decide we need the cash and take it out again before buying any shares. Traditionally, that’s £5,000 used from our annual allowance. But some flexible ISAs will let us replace cash that we hadn’t yet used to buy shares without losing any allowance.
It differs between ISA providers, so be sure to check.
2: Cash ISAs beat inflation
UK inflation stands at 3%. And the best one-year Cash ISA rates are around 4.5%. If inflation falls in the next 12 months, that could be an even better deal.
But when inflation was under 2% and Bank of England base rates were at 0.5%, it was hard to find a Cash ISA paying more than 1%. We could avoid tax, but still lose money in real terms.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
So, this is perhaps only a partial myth. And a Cash ISA can be a good way to save for a rainy day, or for those who want guaranteed interest with no risk. But for serious long-term investment, a Stocks and Shares ISA is the champion in my book.
3: A Stocks and Shares ISA is hard
Picking the right shares, and knowing when to get in and out, surely needs expert knowledge. And the UK’s thousands of ISA millionaires are all financial whizzkids glued to their trading screens all day, right?
That could hardly be further from the truth.
In reality, ISA millionaires put more of their money into investment trusts than other investors, and leave it there.
Scottish Mortgage Investment Trust (LSE: SMT) is one of the most popular. It invests in high-tech growth stocks, and includes Amazon, Meta Platforms, Taiwan Semiconductor Manufacturing, and Nvidia in its top 10.
Some investors buy and sell these stocks regularly, trying to hit the bottoms and tops. They often get the timing wrong, but they can also build up trading charges quickly.
Buy and hold
The really succesful investors simply buy stocks like this, getting them some diversification to soften the growth risk. And they just hold for the long term, through the ups and downs. And even with all the recent Nasdaq volatility, Scottish Mortgage shares are still up 75% in five years.
Oh, and over the past 10 years they’ve gained more than 250%. The Nasdaq volatility does show along the way, mind.
Scottish Mortgage is still a riskier investment than others. But the most successful ISA investors buy safer investment trusts too, with ones that go for dividends from mature UK blue-chip companies being popular.
So that’s the real secret of the ISA millionaires. They spread their money to reduce the risk, resist short-term trading, and just leave it there to compound over the long term. Why make it harder?
This post was originally published on Motley Fool
