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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
If you’re dreaming of a holiday in a far-flung part of the world, investing in a Stocks and Shares ISA could be your ticket to paradise. The tax-efficient savings wrapper is an ideal place to regularly deposit money that can be used to make investments that will hopefully be worth a lot more in the not-too-distant future.
Saving for a holiday requires a different approach to investing than saving for long-term goals like retirement because your timeframe is much shorter. A portfolio that only contains a handful of individual companies may not be the best approach. Stock markets can move down as well as up, so you need think about whether three years is a long enough period to recover from any stock market downturn.
If you have a short investment horizon – i.e. less than five years – you may prefer to look at potentially lower-risk assets like bonds.
One option is a strategic bond fund. This has the flexibility to invest across all parts of the bond market to find areas with the best value. This could help protect you if interest rates rise, which can cause the value of bonds to go down.
An example of a strategic bond fund is Henderson UK Preference & Bond which has a 4.9% historic yield. The fund is down 2.2% over one year but has a three-year cumulative return of 10.1%.
A bond exchange-traded fund (ETF) like iShares £ Corporate Bonds 0-5 year would be a lower-cost option. It has a 12-month yield of 2.9% which compares favourably to its annual charge of 0.2%. The ETF focuses on short duration bonds.
Another way to get bond exposure is via Schroders MM Diversity Income. This fund aims to beat UK inflation by 4% each year over a five-year period. It has a 50% exposure to stocks, 15% in bonds, 10% in alternative assets and 25% in cash.
If you still want high equity exposure you may wish to consider a multi-asset fund such as RIT Capital Partners. This investment trust aims for equity-type returns with less volatility. It has a portfolio of shares, funds, bonds, currencies, real assets and private equity investments.
It’s a good idea to keep your holiday savings pot separate from your other investments. This will enable you to apply a different asset allocation strategy to each savings pot and ensure your investments are on track to meet your respective goals.
Data provided by Morningstar
This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.
Investors acting on the information in this article do so at their own risk and AJ Bell Media Limited and its staff do not accept liability for losses suffered by investors as a result of their investment decisions. Shares is published by AJ Bell Media Limited part of AJ Bell.
