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Article | 13 April 2018 | Investments
An investor who put their full ISA allowance on the first day of each tax year into the index, excluding charges, was £6,627 better off than if they had waited until the last day of the tax year.
The investment industry is full of a lot of very smart people, many of whom spend their time deciding how, when and where to invest their client’s money. Given that investors pay financial advisers and fund managers to make investment decisions on their behalf they shouldn’t spend their time deciding when to hand over their money as that adds another layer of complexity.
So when should investors use their ISA or pension allowance? We looked at the performance of the FTSE All Share over the past 10 years to find out whether it was better to be an early bird investor or leave it until the last minute.
The figures were clear - an investor who put their full ISA allowance on the first day of each tax year into the index, excluding charges, was £6,627 better off than if they had waited until the last day of the tax year.
There are number of reasons why the early bird benefits so much over the last ten years. First of all they get a whole year’s investment returns more than the last minute investor. In this ten year time frame the FTSE All Share actually fell in the first year so the early bird initially lost out.
However, at the start of each year their investment gets an extra boost with the new ISA contribution so the amount at stake is larger than for the last minute investor. This means when the FTSE All Share rose the early bird benefited more. Given that over the long term stockmarkets generally rise the benefits of being early into markets accumulate.
There are other factors to consider as well. Over the past 10 years the ISA allowance has risen from £7,000 each year to its current £20,000 level. This means the potential benefits of being early grew and did so during a strong equity bull market.
Early bird investors also benefit from dividends, which each year account for a few percent of the total return. When that is reinvested and grows alongside your initial investment the effects of compounding add up over the years.
Of course, early bird investing is not guaranteed and in falling or flat markets other strategies are likely to be more beneficial for investors – but that is where a financial adviser and fund manager can help by making smart tactical and strategic investment decisions.
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The information included here is not advice – always seek professional advice if you’re not sure which investments are right for you. Tax rules can change and their benefits depend on your individual circumstances. Care has been taken to ensure the accuracy of this content, but no responsibility is accepted for any errors or omissions. Past performance is not a guide to future performance. The value of investments can fall as well as rise.