Emma Wall: Hello, and welcome to the Morningstar series, Ask the Expert. I'm Emma Wall and here with me today is author and investment strategist, Stephen Sutherland.
Hello, Steven.
Stephen Sutherland: Hi, Emma.
Wall: So, we here today to talk about last-minute ISA tips. Investors have only got two weeks to go before the end of the tax year, and they have £11,520 to shield from the tax man before then if they haven't done so already. What's your first tip to these last-minute ISA investors?
Sutherland: Well, these tips, Emma, they're throughout the year for ISA investors. My first one is education. Now this one is so important, but it's unfortunately often overlooked. What I always suggest to people is that they try to read as many books on ISAs and investing as possible. The key here is to make sure that those books are written by successful investors.
I find that the best ones are written by people who have got a very nice writing style. They talk to on a one-to-one basis and in plain English, and I find that the best investment books are written by authors who've got great track records and they have a deep understanding of how the market works.
Wall: Putting some of that education into practice then; what's your second tip?
Sutherland: My second tip, Emma, is to measure. Now this one is simple, but it does require discipline. What I always suggest is that people measure their annual performance. This is really easy to do. All you do is make a note of what your account is valued at the beginning and at the end of the year. You jot down any additions or withdrawals that you made throughout the year and once you know how well you've performed over the 12-month period, you can then do a comparison versus a popular stock index like the FTSE 100.
If you find that you have outperformed the FTSE, then it tells you that you're doing something right and it gives you confidence to stick with your investment approach. However, if you find that you've underperformed the FTSE, then it gives you the opportunity to then change your investment strategy
Wall: What's the third tip then?
Sutherland: My third and final tip, Emma, is to think long term. Now with thinking long term, this is really good, because it allows you to be a little bit more aggressive with your investment return aims.
Now we aim for 10% to 12% annual return, and we do this for a couple of reasons. The first is because of inflation. Now inflation, unfortunately, kills the buying power of money. That's historically run in about 3% a year. You've also got the cost of investing and that is roughly about 1% to 2% a year. So if you put these two together, you're looking at having to make an annual return of about 4% to 5% just to break even.
Now the other thing that we like about investing for thinking long term is that you can make it a goal for you and your partner to have the maximum ISA allowance each and every year, and as you said in the introduction that's currently £11,520, but it is soon going to be rising from April 6 this year to £11,880. So what we also like about investing for the long-term, thinking long-term, is that you can benefit from the incredible power of compound interest.
And so when you put all these things together, if you learn the secrets of successful investors and you aim to beat the market and you want each and every year and you make it your objective to stay the long-term, invest for the long-term, then you could end up with a very tidy tax-free fortune
Wall: Stephen, thank you very much
Sutherland: You're very welcome
Wall: This is Emma Wall for Morningstar. Thank you for watching.
