Vista - Taking advantage of volatility

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12/08/2020
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This article was correct at the time of publishing however the information contained within it will no longer be current. It may also no longer reflect our views on this topic.

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As we move through the Summer season and are midway through the tax year it’s a good time to review your finances. It is financially advantageous to have your finances in order by the end of the tax year, to consider using any unused allowances left and ready money to deploy at the start of the new tax year.

A good example of this is utilising your capital gains tax allowance, currently £12,300 per year. If you have investments outside an ISA that are sitting on small gains, then these could be sold down so you can use up your current year’s allowance. Remember, with tax allowances you must use them or lose them.

Like most people, since the start of the year my portfolio has decreased in value thanks to COVID-19. However, rather than despair with the loss of value, it is important to look at the positive a decrease in value could do to your portfolio. For example, most investments are now sitting on smaller gains, or even a loss. This ultimately means an investor can sell down and transfer more assets as a proportion of their portfolio to their ISA or SIPP. As well as crystallising a loss which can be used to offset gains elsewhere, if the same investment is made in an ISA then any subsequent recovery in the value of an investment will be sheltered from income and capital gains tax.

Many people underestimate the cost of leaving your finances to later in the year, or even the last day of the tax year. To illustrate the difference in acting sooner rather than later, the table shows the difference in the value of an ISA if invested on the first day of the tax year (6 April) compared to if invested on the last day of the tax year (5 April).

As ISAs were introduced in 1999, the table runs from the 1999/00 tax year up to the end of 2019/20, the end of the last tax year. You will note the large drop in value in the 2019/20 tax year, which was the largest drop in absolute value over this time period. However, it was only the third largest fall in percentage terms. In the tax year 2002/03 the FTSE 100 fell 24.5%, and in 2008/09 it fell 29.3%, but in the tax year 2019/20 it fell 24.2%.

ISA Investment table

 

ISA investment comparison and FTSE 100 five year past performance

 

These figures are only examples and are not guaranteed - they are not minimum or maximum amounts. You can not invest directly in the FTSE. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less than this.

On reviewing this I was shocked at the difference this can make to the overall value of an ISA over a long period of time. A difference of almost £37,000 just by investing at the start of the tax year when compared to investing at the end. 

We can extrapolate this further. Over the above time period, on average, the FTSE 100 has an annualised return of 2.75% each year. ISAs have been going 23 years, and assuming they continue for another 23 years, what will be the value in the tax year 2044/45 and what would the difference in value be if you invested at the start of the tax year compared to the end?

In the 2044/45 tax year an ISA could be worth £1,192,907. However, if an investor had continued to invest their allowance on the last day of the tax year their ISA could be worth £1,106,630 – they could be £86,277 worse off.

Of course, past performance is no indication of future performance, and it assumes the ISA allowance remains at £20,000 but as always, tax rules are subject to change.

Considering the subscriptions to the ISA have been the same in both scenarios, this does illustrate the power of investing in the markets sooner rather than later. And, it is important to factor in that in the above table there were two recessions (possibly three) that effectively halved the markets. This would have suited investing at the end of the tax year, and in fact, if you look between the tax year 2000/01 and 2002/03 (three periods of negative growth) it was better to invest at the end of the tax year.

Nevertheless, as markets have generally gone up over time, the conclusion is that having more money sooner in the market has been more beneficial than waiting.

While the conclusion isn’t surprising, what is, is the difference it could make to investment returns.

 

 

Past performance is not indicative of future performance.

The value of an investment may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax reliefs generally depends on individual circumstances.

Source: FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE ®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

The information contained does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.

Rowan Dartington is part of the St. James’s Place Wealth Management Group. Rowan Dartington & Co. Limited is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 2752304 at St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom.