Avoiding the stock market because of the looming spectre of Brexit is a pretty decent excuse for not investing your Isa allowance this year. But is it valid in reality?
This tax year, you can put away up to £20,000 in an Isa and shelter it from further income or capital gains tax. It’s a really quite generous allowance which is worth using, even if you have more like £1,000 than the full limit. But you must do it by the end of the tax year, which is 5 April 2019, or lose it forever.
Understandably, Brexit butterflies are a hurdle to rushing into the stock market. Nobody wants to invest a slug of money then see it lose half of its value overnight in some horrible no-deal scenario. It’s a dilemma but never fear, I have some top tips for you.
Remember that the Isa can hold either cash or stocks and shares. You can switch from one to the other as many times as you like (so long as you transfer within the Isa rather than sell the Isa itself). It’s possible then to subscribe to this year’s Isa totally in cash and wait until the Brexit dust has settled before transferring it into shares. This way you preserve your tax perks and have some control over the risk of a stock market crash. You could also choose to drip feed the Isa cash into shares over time, lessening the chance of putting it all into shares before a downturn.
Another alternative is to invest outside of the UK and Europe altogether. Despite Trump turbulence, America is still the world’s largest economy and, over time, should tick along nicely. Braver souls might consider Japan, which is looking up, or even emerging markets, although I would recommend only putting a small percentage of your overall portfolio in these places and investing for the very long term.
If you’re cautious but still want a better return on your cash, why not consider government bond or high quality corporate bond investment funds? These tend to do better in poorer economic times and are traditionally less risky than shares. (You can also hold these in an Isa). Every properly balanced portfolio should include bonds, in my opinion, even if their returns aren’t as exciting as shares. Now could be a good time to analyse where exactly your money is invested and fill in any gaps.
There is an argument that the UK stock market is currently very underpriced due to Brexit. Getting in now, while shares are cheap, could work out eventually as a clever bargain buy and a decent profit. If you want to take this route though, I would advise only investing what you can afford to lose and ensuring that it’s money you won’t require in a hurry.
My skinted colleague Charlotte is always reminding me that the ‘tax tail should not wag the investment dog’. While this is good advice, I think it’s a pity to miss out on allowances now which could make a huge difference to capital gains tax bills when you want to sell your (hopefully successful) investments, or take an income from them, some 20 years in the future. So instead of just writing off this year because of Brexit, please consider the points above before you do.
The key to successful investing, I have discovered over nearly 25 years of writing about it, is putting the money away in the first place. This is why I would always recommend a regular Isa savings plan of smaller amounts over any kind of lump sum punt. Saving a fixed amount every month means you buy more when prices are cheap and less when they are expensive: a brilliant strategy for making money without you even having to think about it! If you can’t make this end of this tax year, consider signing up to one for next tax year. See our SMM guide to regular saving plans for more help.