Although this level of turbulence is unprecedented, for medium-to-long term investors, market volatility as a whole shouldn’t be unexpected. Unless your chosen assets are at the very ‘safer’ end of the spectrum (think government bonds) or you opt for savings-based products that can have a fixed rate (i.e. high street savings), regular fluctuations should be anticipated.
But that doesn’t take away the concern you may have if the value of your investments has taken the same southerly direction as the majority of others’ in recent times. It’s a very natural instinct to want to take action in times of uncertainty.
Whilst what action - if any - you may take right now is something that you should seek professional advice on, ISAs are very often discussed, particularly when such discussions happen at this time of the year as your ISA allowance resets.
Although COVID-19 is making most people’s priorities lay elsewhere, it may offer some welcome distraction to explore ISA investments during turbulent times.
Whilst every investor will have their own investment goals, it is crucial from the outset that you are clear about what you are looking to achieve both in the short term and long term. For example you may be considering limiting exposure to the markets, but also have some access to it.
Read More: What are the different types of ISA?
For the experienced investor, many will be considering the diversification within their portfolio (perhaps in the current economic climate now more than ever before), the key rule of thumb is to ensure you don’t put all of your eggs in one basket.
This could entail balancing investments within each asset class, so that you aren’t exposed too much to one particular industrial or geographic sector when considering investing into a Stocks and Shares ISA or IFISA which are not protected by the FSCS.
Cash ISAs on the other hand which are FSCS protected are considered the safest form of ISA, meaning you could get back £85,000 if anything is to go wrong with your ISA provider. However with lower levels of risk comes lower returns, which has been seen first hand in recent months following the cuts to the bank of England base rate, impacting on interest rates on many Cash ISA accounts.
Interest rates on Cash ISAs have been low for some time now, and available financial returns often fail to match the rate of inflation, eroding the value of investments.
This considered, in times of economic challenges, it’s important to have a long term outlook and whilst at the present all sectors seem to have taken a hit by the unfolding of current events, the global economy will recover.
What this looks like at the moment, and when recovery will take place is unclear, however what is probable is that SMEs will continue to need business loans, and the UK will still remain in a housing shortage. This is where IFISAs can prove beneficial.
Read More: The Innovative Finance ISA guide
Where do IFISAs excel?
Having been introduced in the 2016/17 tax year, IFISAs have gone from strength-to-strength in just three short years. By mid-way through 2019, over £1 billion had been invested into IFISAs, showing aside from anything else the desire by UK investors for alternative ways to utilise their annual ISA allowance.
As with Stocks & Shares ISAs, IFISAs are an investment product rather than a savings product, so comparing them to their Cash ISA sibling is inaccurate (the latter’s returns are guaranteed, where those of IFISAs and Stocks & Shares ISAs aren’t). However, the target returns for IFISAs will almost always exceed the guaranteed rates of return from Cash ISAs, often by several percentage points.
One of the reasons why IFISAs have proven to be so popular - and in fact, the reason why they were introduced initially - is they allow investors to become involved in the alternative finance market. A growing market worth over £6 billion in the UK in 2017, being able to invest under the ISA wrapper makes it even more of an attractive proposition - that’s currently £20,000 (as of 2020/21) that can be invested and any returns realised tax free.
Through the IFISA, investors have two high level options as to where they can allocate their money:
- Peer-to-peer (P2P) loans
- Debt-based securities
Moving a step further, you then have two main asset options under each:
- P2P loans - SME business lending and consumer lending.
- Debt-based securities - property and green energy.
From here, there are then an almost innumerable number of options when you take into account all of the various options from each individual asset.
Read More: What assets are IFISA eligible?
For example, if you're a high rate taxpayer then an IFISA peer to peer loan or property bond targeting 7.75% per annum is the equivalent of 12.9% per annum gross assuming income tax at 40%.
What’s more, you can have a considerable amount more visibility over where your money is invested. Investing into a fixed term property bond as an example, investors are able to not only see where in the country their money will be spent, but who the housebuilder is and the teams behind the entire project.
That level of visibility is simply not available via many other investment options. Even when investing directly into a company, you often only know your money is being used to support their growth, not specifically how, where or why.
As such, the impact of your money is much more visible, something that is proving to be a key decision making factor for many investors today.
Looking specifically at their suitability in a turbulent time, that ultimately comes back to the industry or area of your investment. In these times, for SME business loans, there will undoubtedly be a bigger need than ever for investors to provide additional support. This will bring with it increased risk, but the returns are very likely to be in line with this.
With property bonds, we need to look at the housing market. We’ve spoken a lot about this here, but the underlying theme is that there will always be a demand for housing. People will always need property, and in some of the biggest economic disasters of our time - such as the 2008 recession - the housing market came back stronger than ever.
When can Stocks and Shares ISAs be the preferred option?
One of the primary reasons why Stocks & Shares ISAs are chosen is because of the access to the stock market and the shares of specific companies, or funds of collective shares (though various other options, such as unit trusts, government bonds and OEICs (Open Ended Investment Companies) are all possibilities).
Clearly there are numerous other ways to invest into stock markets - from a SIPP (Self Invested Personal Pension) to a direct investment - but the ISA tax wrapper makes the entire process much more appealing when not considering the investment as part of a pension product.
Through a Stocks and Shares ISA, you could invest your entire £20,000 ISA annual allowance (as of 2020/21) into the stock market and realise any gains completely free of both income tax and capital gains tax.
The limit of £20,000 can be a notable hindrance for some experienced investors, but conversely, it’s also the first port of call - if you had £100,000 to invest in the stock market each year, by using a Stocks & Shares ISA you could guarantee a fifth of that would be eligible for tax-free returns.
But through turbulent times, Stocks & Shares ISAs can take a lot of willpower and self-control to ensure you make the best choices for your portfolio goals. Given you can have direct exposure to the stock market, the volatility - and the associated stress - can be immense.
In particularly turbulent times we’re seeing now with Covid-19, most would suggest to ride it out - but when billions are being wiped off the stock market in a matter of days, any losses you may have may only be on paper, but it is still a very real human instinct to want to take action.
Choosing an IFISA or a Stocks and Shares ISA
On the broadest of levels, there’s no right or wrong answer as to whether an IFISA or a Stocks and Shares ISA is best for investors, whether that’s through turbulent times or in general.
Whilst similar in their risk and return profiles - with neither, on a general level, sheltered from the effects of economic factors - the IFISA is preferred by investors who are looking to be more directly involved with the alternative finance market and don’t want to experience the volatility of the stock market.
Yet no one can say whether you should invest in an IFISA or Stocks and Shares ISA. They may fall within the same ISA wrapper, but they’re different investment products and it’s critical you complete your own research and take independent advice to ensure you make the right decision for your investment portfolio.
The MAVEN Bonds product is available exclusively to experienced investors who are classified as either sophisticated investors, high-net-worth individuals or professional investors and have the knowledge and experience to make their own investment decisions. Investments are high risk and illiquid, your capital is at risk and returns are not guaranteed. Bonds are not protected by the Financial Services Compensation Scheme (FSCS).