Those planning to start an ISA in 2025 probably face more uncertainty than in most years.
Interest rates are high, we’re only a few years on from a stock market crash, and economic growth looks wobbly.
Today, I’m looking at three common ISA strategies.
1: The safe way
The safest approach has to be to go for a Cash ISA, especially with today’s best interest rates up around 5%. With UK inflation at 2.3%, a Cash ISA means a positive return in real terms. For now, at least.
I can see why investors who want to minimise risk might put all of their money in one. And I know plenty of people who do. But I see the attraction being only for the short term.
The problem is, cash interest must fall when Bank of England rates come down. And in the long term, Cash ISAs have struggled to keep up with inflation.
2: Pooled investments
The UK stock market has returned a long-term average of around 4.9% above inflation. That’s with plenty of ups and downs though, and the 2020 crash showed just how tough some years can be.
Is there a way to even out the risk, without having to spend ages in deep research? The simplest is probably to buy an index tracker fund, and aim to equal those long-term stock market returns that way.
However we go about it, though, a Stock and Shares ISA could be very volatile at times.
For a bit more focus, I prefer an investment trust, and I chose to put some City of London Investment Trust (LSE: CTY) shares in my Stocks and Shares ISA.
Champion dividends
The trust invests in HSBC Holdings, and I like banks. But if the financial sector should face another crisis, it also holds Shell. What, an oil price crash or a renewable energy takeover? Well, BAE Systems should offer some immunity from that.
It continues, with a wide range of investments in some of the UK’s most solid long-term companies. It’s all about diversification.
There is still risk. If City of London should fail to continue its 58-year run of dividend rises, for example, the share price could fall. In fact, it’s failed to match the overall FTSE 100 recovery since the 2020 slump. But over 20 years, things look good.
3: Pick your own
The ultimate hands-on approach is to pick our own stocks. That can mean rolling up our sleeves, digging into company accounts, and learning what makes our companies tick.
Well, that’s what great investors like billionaire Warren Buffett do. Each of us must decide how much effort we want to put in.
I check annual and interim results, and make my judgments based on my favourite measures. That’s mainly a decent progressive dividend, covered by sufficient earnings, from a company with little or no net debt.
Best of all worlds
Which is the best approach? I think it’s worth considering all three, with emergency cash in an easy-access Cash ISA.
Then my long-term money is split between investment trusts and individual shares, with diversification a key focus.
This post was originally published on Motley Fool
