Tips for Managing Your ISA Portfolio

VIDEO: Keep a close eye on fund and trading fees, invest the maximum allowance and stay the course, says ISACO's Stephen Sutherland

Holly Cook 13 March, 2013 | 7:00AM
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Holly Cook: It's that time of year again. As ISA season is upon us, I'm joined today by Stephen Sutherland, the Chief Investment Strategist of ISACO to talk about how you can use these wrappers to invest and strategies to do so. 

Stephen, thanks very much for joining me. 

Stephen Sutherland: Thank you for having me. 

Cook: So let's start at the very beginning. Why is it that you like investing in an ISA wrapper rather than other wrappers that are available? 

Sutherland: Our two favourites are ISAs and SIPPs. The reason why we like ISAs is because they offer this compelling combination of easy access and long-term tax advantages. The big benefit of investing in ISAs is that all the gains that you make are completely tax-free. And The Financial Times in October 2008, they reported that there are ISA investors with accounts in the tens of millions. So that just shows you the potential of investing in ISAs. 

The other thing that we like about them, Holly, is that you can take an ISA each and every year, and the annual limit for a Stocks and Shares ISA is quite significant. It's currently £11,280 and it's going to be increasing from the 6th April this year to £11,520. 

Cook: So these ISA wrappers can actually, if you play your cards right, help you to become a millionaire with much better chances than the lottery could. 

Sutherland: Yeah. 

Cook: So from a practical point of view, when you are actually running an ISA portfolio, what sort of strategy do you use, whether you are looking for income or for growth? 

Sutherland: We like to focus on growth first and income withdrawals later. We found though that the key with income withdrawals is to draw down a smaller percentage than what your account is actually growing at. 

Now with growth, we aim high. We aim for 12% to 15% returns per year. Why do we aim so high? Well first of all, you've got inflation, that's historically about 3% per year. You've also got the cost of investing, that's another 1% to 2% a year. So put those two together, about 4% or 5% just to break even. And people are living longer. So that means that in our opinion, if you invest too conservatively and you fail to get adequate growth, then you run the risk of running out of capital during your retirement. 

Cook: Absolutely and something everybody wants to avoid. So how do you actually go about creating the right ISA portfolio and then monitoring it and managing it on an ongoing basis?

Sutherland: We start from a technical point of view, and the first question we want to ask is, are we in a bull market? If we are, then we will then look to invest and the way we do that is we go to the Morningstar site. We look for a fund, and if we find one that passes our criteria and it excites us, then we will buy it. We can then easily manage and monitor that fund or the funds we buy by setting up a portfolio on the Morningstar site. That's easy to do. And also you can set up daily alerts that can get sent directly to your inbox, and that's a great way of keeping an eye on your portfolio each and every day. 

Cook: Well it’s great to meet such a vocal fan of the Morningstar website! So, for individual investors who are looking to invest within an ISA wrapper, have you got any sort of top tips that you could share? 

Sutherland: Yes. The first one would be to always measure and monitor your annual performance. Always do that. IFAs and fund supermarkets and brokers, in general, won't tell you to do this but it's so important that you do. Now we like to measure against a popular index such as the FTSE 100. So, if you find that for any reason you are underperforming the FTSE 100, it might be time to take a closer look at your investment strategy. 

Keep a close eye on fees. Try to invest in fund managers with great track records, and for you and your partner to invest the maximum ISA allowance each and every year. Think long-term and stay the course. 

Cook: Thanks very much, Stephen. Those are some very practical tips for us. Thanks for joining me. 

Sutherland: You are very welcome. 

Cook: For Morningstar, I'm Holly Cook. Thanks for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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