It can be difficult to gauge the best time to put your money into markets, particularly at present with stocks approaching all-time highs in the UK and US.
The prevailing advice is to put cash to work as soon as possible, so that you can get the most from compounding returns. Yet in reality, things get in the way, which means money can sit on the sidelines for far longer than anticipated.
This has been the case for Ben and Zoe (not their real names) who have £60,000 in a stocks and shares ISA with Hargreaves Lansdown. It has been sitting in cash for the past three years because they have struggled to find time to invest it; like many couples in their mid-to-late forties, life is frenetically busy with work and raising their children.
They both have good jobs and have paid off their mortgage so have no immediate demands upon their savings and want to put the money to work in a small number of funds.
Ben’s corporate pension is invested in a passive global equity fund which has performed phenomenally for the past decade and he is keen to replicate that strategy with the ISA. He describes himself as a medium-risk investor.
Lena Patel, a chartered financial planner with ISJ Independent Financial Planning, said high-rate taxpayers such as Ben should first make sure they are topping up their pension allowances and benefiting from the 40% tax relief. “There are not many investments where you get 40% tax relief straight away.”
Patel advises her clients to keep six months’ worth of net income in cash in case of emergencies or redundancy, so she suggested that Ben and Zoe might want to keep some of their ISA savings accessible in cash unless they already have such a buffer.
But with some £60,000 sat idle, even after this there is likely to be plenty left over to invest. The next question then is what these ISA savings are for. Do Ben and/or Zoe want to take early retirement? Are they saving for their children to go to university or for a deposit on their first homes? These factors will impact the time horizon for their ISA investments.
Presuming that they won’t need to draw on these savings for the next decade or so, especially if they have a cash buffer for emergencies, then a low-cost, passive global equity fund would deliver long-term growth, Patel said. In a worst case scenario, they would still be able to access the money if needed because passive equity funds are very liquid.
Equity market valuations are quite high currently however, particularly in the US, which dominates global indices. For this reason, Ben and Zoe may wish to drip feed their savings, Patel said.
She recommended investing the majority of the ISA now because “it’s better to have time in the market rather than timing the market” but to drip feed next year’s ISA allowance via monthly contributions to benefit from pound cost averaging.
Not all experts were concerned about market timing. Although global funds do have a large allocation to the US equity market, they also include more attractively valued markets and companies, and save investors the trouble of having to decide where to allocate money, said James Norton, head of financial planners at Vanguard in the UK and Europe.
“The nice thing about a global index fund is you’ve got today’s winners, but if they start to underperform, then you’ve got tomorrow’s winners as well,” he said.
Darren Cooke, a chartered financial planner at Red Circle Financial Planning, pointed out that investing everything in stocks is not usually considered medium risk.
“Ben could look for a multi-asset fund that blends global equity with fixed interest, which would be a traditional way of reducing risk. That said, that hasn't worked out very well over the past two years as fixed interest funds have proved to be just as risky as stock markets,” he said.
Ben’s pension fund has benefitted from a global stock market rally driven by economic stimulus and cheap borrowing costs, whereas going forward, economic and capital market outcomes look very different, said Ernst Knacke, head of research at Shard Capital.
He expects rising volatility, burgeoning risks and structurally lower market valuations. “Risks include significant debt monetisation, currency devaluation and an inflexion point in global demographics, which will lead to a material rise in government liabilities,” he said.
Therefore, by investing the ISA in passive global equities, Ben is unlikely to replicate the success of his pension fund.
Instead, Knacke suggested diversifying into gold, inflation-linked government bonds and managed futures to “provide stability and protection during macroeconomic environments associated with monetary devaluation and anaemic growth, whilst ensuring the portfolio maintains a positive expected return in real terms.”
For the equity piece, Knacke prefers using active managers to take advantage of secular themes or deeply undervalued equities. “Within the equity space, we see very compelling opportunities in Japan, Asia and emerging markets. More locally, UK smaller companies are both deeply undervalued and under-owned. Managers that we believe offer compelling exposures include Zennor Japan, Prusik Asian Equity Income, Veritas Asian and Heptagon Kopernik Global Equity.”
He also highlighted the Eagle Capital US Equity fund – “a concentrated, large-cap, US equity strategy with a robust process and excellent team”.
Given Ben and Zoe’s long-term mindset, Knacke also recommended tapping into thematic growth opportunities such as artificial intelligence and the intersection between health sciences and technology through funds such as Polar Capital Artificial Intelligence and Polen Capital Global Growth.
A final consideration for Ben and Zoe is whether they might benefit from working with a financial adviser, who would probably have encouraged them to invest their ISA sooner. By staying in cash, Ben and Zoe avoided the ravages of 2022 but missed out on last year’s gains.
Cooke said: “Not investing will have cost them a pretty penny, particularly as Hargreaves Lansdown doesn't pay very good rates on cash held in its ISAs. At least an adviser would make sure they use ISA allowances each year and invest the money, not leave it sat in cash. That alone would have paid an adviser’s fees over the past three years.”