5 Ways to Minimize Risk on Your Shares ISA
You may have heard that a stocks and shares ISA is the best way to invest your money in a tax wrapper. However, the mere idea of playing the market with your hard-earned cash is enough to raise your heart rate, whether or not there are tax benefits.
What do you do to keep your ISA investment as safe as possible, without giving up your earning potential? We have five ways to minimize the risk on your shares ISA so you can make a decent return on your money and still sleep soundly at night.
Diversification is the mantra of every stock broker and financial advisor across the UK. Create a portfolio that includes an array of stocks, bonds and funds that balance one another in terms of potential earnings and risk. The ultra-conservative can put half their money into fixed-interest investments like bonds and gilts, while the other half can assume a bit more risk and a higher earning potential. The advantage of a diverse portfolio is that you can customize your choice of investments to your own personal comfort level.
Even during tight economic times, blue-chip shares tend to bring in a decent return. The most common way to invest in these star companies is through an equity-income-fund. However, even blue-chip investments are not completely without risk, particularly in a volatile market like the current one. Invest with care, and plan to leave your investment in over a minimum of five years so you are more likely to ride out possible downturns in the market.
The Name is "Bonds"
For those who are extremely skittish in the investment arena, bonds are usually a good choice. ISAs can be invested in different types of bonds, including private sector corporate and government bonds. While your rate of return might be lower than stocks, the peace of mind is often worth the difference. Put a percentage of your ISA in bonds; the percentage amount will be up to you and your nerves.
Don't Lump Payments
You can also minimize risk by spreading your ISA contributions out over a year's time. Many fund managers will allow you to divide your maximum contribution amount so that the money is invested over three, six or twelve-month increments. This allows you to wade into the investment sea rather slowly, using strategies like dollar-cost averaging, until you determine that the water is fine.
Be a Trend Bucker
History shows that the most popular performers today will probably not bring the best returns next year. In other words, don't base your choices on ISA investments on the past history of a company alone, particularly if that history is a relatively short one. It is also never advisable to simply hop on the investment trend bandwagon, since these trends are rarely rooted in factors that typically go into determining the best stock options.
Shares ISAs may carry more risk than cash accounts, but they don't have to make you wake up in the middle of the night in a cold sweat. With these tips in mind, you can enjoy a decent potential return on your investment with less risk than you might think.