For many people, a stocks and shares ISA represents their first foray into the world of investing.
If you're ready to invest but perhaps feel a little uncertain, allow us to lighten the load by helping you master the basics.
Why is investing important?
It's likely that the interest rates offered by many savings accounts (particularly when the Bank of England base rate is low) won't keep pace with inflation, meaning over time your purchasing power will decrease. Ultimately, as inflation rises, the value of your money declines.
Investing can be a great way to give your money the chance to grow over the long term. The longer you keep your money invested, the more chance it has to both grow, and recover from any dips in the market.
Why do people invest?
Investing can generate potentially higher returns over the long term (at Zurich, we consider this to be at least five years), helping people reach their long term financial goals (take a look at our article on whether you should consider a stocks and shares ISA to save up a lump sum).
What’s the catch?
When you invest in the stock market, there’s an element of risk involved. The value of your investments can rise and fall, and you may not get back the full amount invested. Even though investing over the longer term offers the potential for significant growth, it is this 'risk warning' (as we call it) that leaves some feeling a bit edgy.
Helpfully, you can reduce this risk through what is called 'diversification'. This means spreading your investments across a range of asset types such as cash, fixed interest securities, bonds and, yes, stocks and shares. Some investment funds, such as multi-asset funds (the clue is in the name), do this automatically.
How long should I invest for?
Good question. We believe investing is for the long term (at least five years); so it isn’t suitable if you need quick access to cash.
Long-term investing also gives you more time to recover from possible losses during dips in the market.
What do I need to consider before I invest?
Though you may not know it (or even have heard of it!), everyone has an 'attitude to risk' (ATR). This determines the level of investment risk you’re willing to take and helps you choose a fund (or funds) that is (are) in tune with your ATR.
You should also consider your 'capacity for loss' should stock markets take a bit of a tumble - would you still be OK financially if you lost most or all of your investment? (NB: Though attitude to risk and capacity for loss are inter-linked, they are not the same thing).
Take a look at Zurich's Stocks and Shares ISA tool, which includes a short attitude to risk questionnaire to help you see what your risk profile is.
What's the difference between a cash ISA and a stocks and shares ISA?
Cash ISAs are similar to standard savings accounts (i.e. your money isn't invested, but earns interest), but with one powerful extra: they are also a tax shelter. This means you won't pay any tax on the interest your money earns.
On the other hand, stocks & shares ISAs provide you with a tax-efficient way to invest in the stock market. They are structured differently to cash ISAs in that you invest in funds which then invest in the stock market. Each fund pools your money with other investors and is run by an investment manager.
How much can I invest?
In the current tax year (which runs until 5 April 2018) the ISA limit for both cash and stocks and shares ISAs is £20,000. This means an individual can invest £20,000 as a maximum across both. For example, you could invest £18,000 in a stocks and shares ISA and £2,000 in a cash ISA.
And, just like saving, you can either invest a lump sum or a regular amount every month, if you find that more manageable.
How do I know which option is best for me?
If you’re saving for short-term goals, you may want to consider keeping your money in a standard bank account or cash ISA.
Investing is for goals you see yourself achieving five, 10, or even 20 years down the line. And those goals, as well as their timeframes, should largely inform which investments you choose.
The Zurich Stocks and Shares ISA
Take the Zurich Stocks and Shares ISA, for example. It offers a flexible and tax-efficient way to save for long term goals. We like to keep things as simple as possible, offering access to five funds (called the Zurich Horizon Multi-Asset funds) designed to reflect a range of risk levels.
For example, the Zurich Horizon Multi-Asset Fund I has been designed for attitudes to risk at the lower end, while the Zurich Horizon Multi-Asset Fund V has been designed for attitudes to risk at the higher end.
If you think you're ready to invest, or would like more information, visit the Zurich stocks and shares ISA page.