It’s never easy to take the plunge

This article first appeared in the Telegraph

WHAT As the first quarter of 2022 draws to a close and the last day of the fiscal year looms, a familiar British ritual will take place across the country this weekend. People will sit down, coffee in hand, to ‘do their ISA’. They will, at the last minute, tap into their annual ISA and SIPP allocations, putting some money to work in the market before the window of opportunity slams shut at midnight on Tuesday.

There’s not a very good reason why they’re doing this on this particular weekend, other than the obvious. Being human, we leave things that only interest us a little until the last possible moment. I’ve been writing about this for thirty years and more, but I’m as lastminute.com as the next man. There are, let’s face it, more interesting things to do.

If you are one of the many who have left until the last breath of the fiscal year to decide where or whether to invest, it is very possible that you have doubts. Look at the performance of the stock market since the turn of the year and it is unlikely that you will feel a compelling need to act.

Unusually, the FTSE 100 has outperformed its global peers so far this year, but its UK holdings are still close to where they were three months ago. The money that could have been invested in the US or Japan will be modestly under water. If you were feeling more adventurous three months ago and put some money into the Chinese market, you would have been down 15% if you had followed the CSI 300 Index. Its bonds just endured their worst month since 2016.

One of the troubling things I’ve noticed over the last few weeks is a correlation between how long someone has been investing and their desire to hold it at the moment. If you are new to this, perhaps because you had some extra money in the early days of the pandemic, this may be your first experience of markets not going up nicely. Now probably doesn’t seem like the time to get more exposure to a market that no longer seems like a one-way street.

There has been a reason to get your financial house in order this time of year for as long as I have been watching the markets. Before ISAs came along in 1999, we enjoyed the tax benefits of Personal Equity Plans (PEPs) introduced by Nigel Lawson in 1986. Since then, the size of the allowance and its name have changed but not the basic principle. Save inside the tax-advantaged package and you can forget about both capital gains and income taxes. You don’t even need to tell the tax collector what you’ve done. What’s not to like?

Today, with a little forethought, most of us can forget about taxes on our investments altogether. With the ability to set aside up to £40,000 in a self-invested pension and £20,000 in an ISA, you have to be fairly wealthy (or receive something exceptional like an inheritance) to save more than the generous annual limits. Even if your partner is not working, you can put the same amount into your ISA and a token amount into a pension for them as well. A working couple can save more than £100,000 a year without a moment’s thought about the tax implications. There are even versions for your children. Nobody can complain that there are no incentives to save.

That’s what we should be focusing on this weekend. But we’re less likely to be thinking about the tax wrapper than what we’re putting inside. And with a long list of things to worry about, it will be very tempting to do nothing and let the moment pass. With the war in Ukraine, the high cost of fuel for the car, filling the fridge and heating the house, rising interest rates, not to mention the return of Covid in China, the list of reasons to sit on our hands is long and getting longer. .

And so it has always been. There is a temptation, which my industry is prone to, to focus on the long-term performance of the markets as if we all traded on a 20:20 forecast. My new copy of the Credit Suisse Global Investment Returns Yearbook tells me, for example, that £1 invested in the UK stock market in 1900 has grown to be worth £46,229 today. Even adjusting for inflation during that period, the British pound has grown more than 600 times. In the US over the same period, $1 would have made you $2,698, adjusted for cost of living. Remember that past performance is not a reliable indicator of future returns.

But to benefit from the stock market’s remarkable alchemy over the long term, you must be prepared to look beyond today’s headlines. Thirty years ago, when I was thinking about my 1992 PEP, the siege of Sarajevo had just begun, apartheid was in its last throes, and the IRA was still blowing up buildings in London.

Twenty years ago, when I was wondering whether to cash in on my 2002 ISA, we licked our wounds from the bursting of the dot-com bubble, reminisced about 9/11, and wondered where the war on terror would take us. Ten years ago, in April 2012, we were mired in the Eurozone debt crisis.

The present is always worrying, and the future uncertain. Only the past is seen as crystal clear with the benefit of hindsight and that is of no use to an investor. So, you have my sympathy this weekend. It is never easy to take the step. There are no guarantees, of course, but I’d be surprised if you don’t thank yourself one day for what you do this week.

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