Your top five ISA resolutions for this tax year

As a new tax year begins, it is worth starting out with good intentions. While your long-term returns will depend on how much you invest and the investments you choose, there are a range of small-but-mighty habits you can employ to boost the growth in your ISA and ensure compound growth works to maximum effect.

Start early

Investors are prone to leaving their ISA investment to the last minute. Every year, investment platforms report a rush of applications on the last day of the tax year. However, this approach means investors miss out on a whole year’s worth of income from their investments and potential capital gains. It makes more financial sense to invest as early as possible in the tax year, rather than leaving it to the last minute.

Investing early is a habit embraced by the most seasoned of investors who realise that time in the market can be a powerful ally. For example, research from interactive investor found that 28% of contributions from its ISA millionaire clients were made within the first weeks of the new tax year.

There are sound reasons for this. Investing early boosts the compounding effect over time. Investors generate returns on that extra 12 months’ growth and income. The impact may be relatively small in the first year, but like a snowball rolling down a hill, it picks up speed over time.

Keep it consistent

At a time when markets are volatile, maintaining consistency with regular investments becomes more important. It naturally chimes with the way most people invest anyway, putting smaller amounts to work every month or every quarter. It also helps manage market volatility: if you invest regularly, you are putting money into the stock market at different price points. If markets fall, you can be reassured that the next payment will go in at a lower level. This effect – known as pound-cost averaging – can deliver a smoother return over time.

It can also help with the thorny problem of investor psychology. Most investors feel reassured by the collective wisdom of markets. If an area is very popular and seeing significant inflows, it must be a good place to invest. The problem is that this tends to lead investors to areas where valuations are already high. Equally, if markets are rocky and investors are selling, you may prefer to wait until everything looks better before investing. In this way, human instinct is to buy at high prices and sell at low prices, the exact opposite of the best way to generate long-term returns.

Saving regularly can be a good way to take the emotion out of investing. You don’t have to think whether you should or shouldn’t invest each month, or which investments to choose. It all happens automatically. It helps make sure you keep investing through difficult periods and that you naturally manage market volatility.

Keep calm and carry on

Markets are noisy at the moment. Policy-making in the US has been unpredictable, and investors are still weighing up the impact for companies. Financial markets tend to respond first and ask questions later. This can feel very uncomfortable in the short term and the temptation can be to move out of markets altogether.

The problem is that investors will often move out just as markets are hitting their nadir and they will miss the bounce when it comes. Missing just a handful of days in the market can meaningfully impact your returns. Someone investing in the S&P 500 over the past 30 years would have picked up an average annual return of around 10%. However, missing only the 10 best days in the market over that time would have seen their returns halve.

Even crises that feel enormous at the time – the global financial crisis, for example, or Covid – tend to appear as a blip in the long-term trajectory of financial market growth. If investors have time on their side, they can usually just wait out the turmoil until normal service is resumed.

Reinvest those dividends

Reinvesting dividends is a great way to get compounding working in your favour. Most investment platforms will let you use dividend payments to buy more shares. You then earn dividends and potential capital growth on that larger holding. According to calculations from Evelyn Partners’, over the last forty years, the FTSE 100 has made a capital return of 391%. But with the dividends reinvested the total return leaps to 1,926%. It can be a powerful way to super-charge your investments.

To reinvest dividends for investment trusts, you simply need to set up an automatic reinvestment option through your investment platform. Reinvestment costs are usually low: using interactive investor as an example, dividend reinvestments cost 99p on its Core and Plus accounts but are free on Premium.

Use as much of your allowance as you can

Unlike pensions, ISAs work on a use it or lose it basis. The £20,000 allowance re-sets at the end of every tax year. Where possible, it’s worth using your ISA allowance in full every year. There are a number of investment trusts that would have made ISA millionaires of those canny investors who have invested their full ISA allowance every year.

While ISAs don’t have the same tax advantages as pensions on contributions, all income generated on investments held within an ISA is tax-free. With this in mind, they can be a powerful way to build a long-term income stream. With the right investments, that income stream can grow over time. Investment trusts have a strong track record here, with a number of ‘Dividend Hero’ trusts having grown their income for 20 years or more.

These are simple wins to ensure you get the maximum from your ISA this tax year and put you in the best possible position next year. Investing doesn’t have to be complicated, but it does require some consistency and a level head during periods of volatility.

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