Any advice on moving my cash savings to a Stocks and shares ISA?
21 May 2021
Question by Andy
Hi, as we're not far into the 21/22 tax year, and with my cash savings paying very low interest, I am considering opening a new stocks and shares ISA. I have around £15,000 in a cash ISA, that I have NOT paid into in the current tax year, and some additional funds in easy-access savings that I am also willing to put into stocks and shares. I also have additional savings that I am NOT willing to invest. I have read that it is wise to make regular payments (drip-feed) rather than lump sums to benefit from pound cost averaging, and I intend to use the full £20,000 ISA allowance for this year, however my question is - is it better to: a) transfer the entire cash ISA to a stocks and shares ISA (thereby preserving the full allowance for this year) and drip-feed regularly from easy-access savings, maximising the total investment for the year, or b) open a new stocks and shares ISA, drip-feed regularly from both the cash ISA and easy-access accounts, but limiting the total investment for the year to £20,000? Or is it purely a matter of attitude to risk? Thanks Andy
Answered by Ian Else
Moving any money from cash to a stock market linked investment is a big decision and you should consider both the potential benefits and drawbacks carefully. The first thing to think about is time horizons, a stock market investment should be considered long-term, that means if there is any possibility that you will need access to the money within the next 5 years, you should not invest. The second thing to think about are emergency savings, you mention you have additional funds in an easy access savings account, but not how much. I would always recommend that you keep between three and six months expenditure somewhere that is easily accessible in case of emergency. Finally, you should make sure you have protection in place in case life gives you lemons, make sure you could manage if you were unable to work through illness and protect your loved ones if you were to die prematurely. Once those three areas have been covered, then you can consider investing.
Pound Cost Averaging, is the concept of investing regularly with the aim of smoothing out any volatility. The idea behind it is to provide some protection against the possibility of the market dropping sharply shortly after the money is invested. After all, no one wants to accidentally buy at the top of the market. So instead of the entire investment suffering this loss, only the invested portion does. The remainder is then invested at lower prices. In this way, pound-cost averaging can work well in a falling market.
However, the market goes up more often than it goes down. It rises 6 out of every 10 months*. By drip feeding into the market, the odds are that it will cost you money rather than save it. However, research has shown that losses negatively affect people twice as much as gains give positive emotions. So, while the statistics say you’re better off not drip feeding, the people that do and miss a dip will be extra happy about it.
*Source: Vanguard calculations using data from Morningstar. Stock market represented by FTSE All Share Index from 31 May 1990–31 May 2020. During this time, the index had a positive return in 222 out of 360 months (62%) and a negative return in the remaining 138 months (38%). Note: Past performance is not a reliable indicator of future results.
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I started working in financial services in 2008. Prior to that, I sailed professionally, working for Chay Blyth's BT Challenge. I've always wanted to help people, but was never smart enough to be a Doctor, so I help people with their finances instead. I'm passionate about offering cost-effective advice to as many people as possible.