Why it could be time to invest in courage

Mar 13 2009 by Trevor Law, Birmingham Post

The “ISA season” – if there is still one – will soon be upon us with less than a month to go before the end of the current financial year.

Many investors may steer clear of using their allowances, given the bad news since the credit crunch began in July 2007 and which turned into something far more sinister around the middle of 2008.

However, are they missing an unbelievable opportunity?

Reviewing investment portfolios is not for the squeamish at present – many of you may not have even wanted to look. 

So, the first option is to batten down the hatches, ride out this storm and hope for a recovery.

If you don’t need cash from your existing portfolios then, for most, this would seem an admirable course of action as any selling now means crystallisation of losses.

A further option is to invest more now.  This may sound crazy but if you can show just a little courage, you could well be rewarded, given a medium-term view.  I would not be so brave, so naïve, as to say we have definitely seen the bottom of the markets but there is surely value to be had at current levels?

Take the FTSE 100, for instance, an index most of us know.

In July 2007, it was at 6,700; now, it stands below 4,000, a fall of over 40 per cent.

Whenever there is a “sale” of similar magnitude at House of Fraser, B&Q, etc we all rush to the front of the queue but do we have a similar mindset when it comes to investing?

Of course not. 

When things are going great and the bulls are in town, we invest – at precisely the wrong time.

Investors should stop following the herd and I make no apology for repeating the words of Warren Buffett (the world’s wealthiest man, thanks to prudent investing): “Be fearful when investors are greedy and be greedy when investors are fearful”.

It is not only equities which are discounted.

Commercial property has had a dire period. Personally, I think this sector has further to fall, although certain high-profile fund managers are beginning to buy back into it.

Falling interest rates are also making Investment ISAs look attractive as your money is not exactly working hard for you here.

The best cash ISA rates at present are a little over three per cent which could well help the corporate bond sector in 2009 – widely-touted by many commentators as a good sector to be in.

Cash, I would argue, certainly isn’t.  Back to Mr Buffett, who commented in October 2008: “Today, people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.

“Indeed, the policies that government swill follow in their efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.”

So, this is a recap on what you can now invest in an ISA after the changes, put in place by Gordon Brown in his former position as Chancellor, which came into effect in April last year.

He announced a “whopping” increase from £7,000 to £7,200 in an investment ISA (formerly Stocks & Shares ISA) of which £3,600 can go into a cash ISA – as I have mentioned, there is no great value to be had here.

There are, though, positives to be taken from the new regime other than the “higher” annual investment limit:-

n ISAs will be available for an indefinite period, as opposed to until 2009 as was previously the case.

n Existing PEPs will automatically become Investment ISAs.

n The distinction between Mini- and Maxi-ISAs will be abolished, with accounts being re-designated as “Cash ISAs” and “Investment ISAs”. Anything to make things simpler has to be an improvement.n Transfers from the cash component of existing ISAs will be permitted into the stocks and shares component and will not count against the current year’s subscription.

n Money held in Child Trust Fund (CTF) accounts can be moved into an ISA once the child reaches 18 years of age.

I think the last two points above offer the greatest improvement and opportunity for investors.

Many will have built up sizeable cash ISA portfolios over the last eight years or so.

Couples who have invested the maximum allowable over the years could well have cash ISA portfolios in the region of £50,000 or above.

Now they have the opportunity to switch to other asset classes – equities, fixed interest, property, commodities to name just a few.

This gives much greater potential for growth over the medium term although it obviously brings with it greater risk to what was formerly a safe investment.

In any event, choice has to be good and this facility will prove attractive to investors seeking higher returns, higher-risk or potentially higher income especially given current market conditions.

The CTF/ISA facility is also a potentially generous feature, provided parents can persuade their children not to buy a car, go travelling, throw a huge 18th birthday party for their friends.

That is not as far-fetched as it sounds because your children have complete control of their CTF when they reach 18.

So, for the responsible teenager or for those who listen to their parents, the opportunity to switch their CTF into a tax-free environment is excellent.

So, in summary, ISAs are still one of the few remaining tax-free vehicles so why not make the most of them now?

Married couples could invest close on £30,000 over the next month or so (ie. one each either side of the financial year end) and reap the rewards by showing a little conviction now – unless, of course, you think Armageddon is around the corner.

* Trevor Law is a director with Montpelier (Europe) Ltd, the independent financial advisers based at Barston near.Solihull. E mail: TIlaw@montpeliergroup.com