Crippled by market fear? Seven last-minute ISA tips for investors

The ISA season deadline is looming in one of the most dramatic ends to the tax year that we’ve seen in markets. Many investors may be nervous about where to invest their money, but will also not want to miss out on their ISA allowance for the year – because if you don’t use it you lose it.

The FTSE 100 has already fallen 27% so far this year, while the FTSE 250 has dropped 34%. Global markets haven’t been spared, with the S&P down 22% since the start of 2020, while the FTSE All Share is down 28% and Hong Kong’s Hang Seng index is down 19%.

Against this backdrop it’s understandable that investors are worried about committing their money to markets and choosing where to invest. Rather than be crippled with fear and resorting to do nothing, investors can take these steps to make sure they can still use their ISA and try to avoid timing the market.

1. Get some protection

If you’re not optimistic about the ability for global stock markets to rebound soon, and worry that things will get worse before they get better, you could opt for a fund that aims to be ‘recession-proof’. While these funds don’t guarantee not to lose you money should markets fall further, they do aim to reduce the amount of money you lose if we see more falls.

One option is Evenlode Global Income, which invests in around 40 large companies around the globe, offering some diversification between different countries and markets. The fund managers hunt out holdings that have low levels of debt, high profits and require less capital to operate than their competitors. While 40% of the fund is invested in US firms and another 24% in UK companies, there’s a spread across smaller markets too.

Another option is Janus Henderson UK Absolute Return. While many absolute return funds have got a bad reputation, this fund has held up well in recent market volatility and protected against losses. Since the start of the year it has lost 0.9%, when markets have fallen by much more. The fund has the ability to have a significant amount in cash, to protect against stock market falls. However, the compromise here is that it charges a performance fee and is pricey, with an OCF of 1.05%.

2. Invest regularly

It’s always nigh-on impossible to accurately time markets and never has that been truer than the current volatile landscape, where indices yo-yo around on a daily basis. This means investors who’ve left it to the last minute might be worried about committing all their money to markets on one day, in case they fall 10% in the following day.

However, investors can pay money into their ISA and not invest it all on the same day. Instead, there is the option to get the money in your account or in a cash ISA to secure this year’s allowance, but then set up regular investing to drip-feed it in the market over a timeframe you feel comfortable with. By setting this up to automatically happen you avoid the risk that you’ll try to time the markets, and also avoid your money sitting in your ISA earning no interest until you get around to investing it.

3. Don’t forget bonds

Since the start of the year only around 100 funds of the 4,000 in the Investment Association universe have managed not to lose money for investors – and a majority of these are bond funds. This doesn’t mean that now is the time to pile into bonds, but it does highlight the benefit of diversifying your money. People are often drawn to investing in equity funds, as they are more exciting and tend to be talked about in the press more, but having a decent allocation to other asset classes can help to reduce your losses in volatile markets, like we’re seeing at the moment. It’s important to remember this as you invest your ISA for this year.

4. Fund your account to get bonuses

If you have a Lifetime ISA then you could pay the money into your account to be able to claim your Government bonus, but wait to invest it. The annual allowance for the Lifetime ISA is capped at £4,000 (which counts towards the £20,000 ISA allowance) and while money held in cash in an investment ISA will earn minimal or no interest, you’ll automatically get the 25% Government bonus on the money held in a Lifetime ISA, which you can invest when you’re more comfortable with markets. So, if you have both a Lifetime ISA and an investment ISA, you might be more concerned about missing out on any remaining amount of the £4,000 Lifetime ISA allowance you have available,.

Find out more about our Lifetime ISA

5. Think of the whole family

While you may have sorted out your ISA months ago and filled your annual allowance, have you considered your entire family’s ISA allowances? Maybe you forgot to fill your children’s Junior ISA allowance or your partner hasn’t topped up their account. A family of two adults and two children can put £48,736 into their ISAs in the current tax year, and this rises to £58,000 from April 6th when the Junior ISA allowance leaps to £9,000. What’s more, a strange quirk in the system means that if you have a child between the age of 16 and 18 they get both the Junior and Adult cash ISA allowances, so they alone get an annual limit of £24,368 this tax year.

Find out more about our Junior ISA

6. Don’t know what to do? Outsource the decision

If you’re in a complete muddle about where to invest you can outsource the decision to a professional. Lots of so-called ‘all-in-one’ funds have popped up over the years that take care of asset allocation decisions for you. You can pick different versions of the fund depending on how much risk you want to take and how much money you want in stock markets, versus bonds and cash. Taking this approach means you don’t need to worry about whether you should be tinkering with your allocation or fund holdings or making a call between US equities or emerging market bonds, for example.

Our AJ Bell funds are an example of these “all-in-one” funds.

7. Think about your risk level

A bit like 80% of drivers thinking they are above average behind the wheel, lots of investors think they can handle more risk than they actually can. Market shocks like this can be a good test of your real risk tolerance and how you react when markets see sharp falls. Often people overestimate how much risk they are willing to take, but when faced with the reality of market falls realise they have been a bit optimistic with how much they can tolerate.

If that’s the case it could be a good idea to think about some lower risk funds or investments you might want to make, or some high-risk investments you might want to avoid buying more of. But think about this carefully before you do, to make sure it’s not just a knee-jerk reaction to current market conditions.

Find out more about our Stocks and shares ISA