Was 2021 rough on my ISA investments?
I am not a financial guru or prophet. So, if you are reading this expecting five tips on how 10x your returns for 2022 this is not the article. If you want a transparent overview of how my investments went in 2021, then you have come to the right place. I wrote this article with beginners in mind, but I think a seasoned investor will also find it interesting.
To set the scene, I opened my first Stocks and Shares ISA (Individual Savings Account) account 2 years ago. So I’m relatively new to this personal investing space and I do not trade/invest in crypto, forex, or options. The objectives behind my ISA investments are quite simple:
- Be as passive as possible,
- Have a long-term approach,
- Sparingly make a few risky moves and,
- Have returns of about 10% on average annually.
As I become more experienced with investing, I believe my goals would be more ambitious. I do not have an investment coach; I am not part of any social media investment channels, e.g. Private Discord, telegram or Reddit groups. I’m pretty much what you would consider a “passive newbie”.
Well, there are two YouTube channels I follow religiously: PensionCraft (hosted by Ramin Nakisa) and Sasha Yanshin. These guys have a well-rounded approach to explaining the fundamentals of the stock market. As a ‘passive newbie’, it’s important to understand these fundamentals. Maybe next year I might start following more ‘speculative channels’.
Most of this article targets those who are new to investing primarily in the UK and one of the first questions people who are new to investing ask is ‘where do I start?’. Although I cannot explicitly answer this question, I will tell you what I’m currently doing.
Overview of ISAs
Since I am only talking about my ISA investments, I think it is worth summarizing what ISAs mean. In the UK, we have these tax-wrappers called ISAs. An ISA is a savings/investment account that shields most of your income or capital gains from taxes. I say most because sometimes you might still pay taxes under certain conditions. There are four types of ISAs:
- Cash ISA
- Lifetime ISA
- Stocks and Shares ISA
- Innovative Finance ISA
In the UK tax year (starts on the 6th of April each year and ends on the 5th of April the following), you are allowed to invest up to £20,000 across all these ISAs. However, the Lifetime ISA has a cap of £4,000 each year.
Why should I use an ISA over a normal savings or investment account?
You do not have to pay any income tax on any dividends you receive and any capital gains tax on any profits you make when you sell. However, you still have to pay a stamp duty tax which is 0.5% of the cost of any UK-listed shares you purchase. Stamp duty tax does not apply to UK-listed ETFs or stocks listed on the AIM and other non-UK exchanges.
In the UK, the Capital Gains tax-free allowance is £12,300. If you have any capital gains above this allowance, you would have to pay 20% if you fall into the higher or additional rate taxpayer band and 10% otherwise. It’s a bit more nuanced than this, but this is the general gist. The income tax on dividends is slightly different. The government gives you a dividend allowance of £2,000, but you can add your personal allowance of £12,570 if you do not have any wages/salaries. In my case — I work and my salary is above the personal allowance — my dividend allowance is only £2,000.
If you exceed this allowance, then you would have to pay taxes depending on the Income-tax band you fall into after adding up your dividends and your salary.
I think the benefits of ISA are best explained by using examples.
Let’s imagine we had three people. Person A and B have the Stocks and Shares ISAs. Person C has a General Investment Account.
They decide to challenge themselves and save around a third of their income after tax. Person A saves £8,000 and Person B and C save £15,000 annually. Let’s assume they did this for ten years straight and all their investments went up by 10% annually and a dividend yield was 1%.
How much would they have had at the end of the fifth and tenth year?
From the infographic we see it does not matter if Person A had a stocks and shares ISA or not, they would not pay any taxes in those 10 years.
Persons B and C have different balances after investing the same amount and getting the same returns for 10 years. Person B had £278k in their Stocks and Shares ISA and Person C had £259k in their General Investment Account. This means that Person B has had an additional £19k to their name. As time goes by, the benefits from the tax savings increase due to compound interest and Person B will get to a million pounds 3 years before Person C does.
I currently have two of those four ISAs:
- Freetrade. This is my Stocks and Shares ISA. I used Freetrade because it is relatively low cost, i.e. I only have to pay £3 a month (£36 annually) and I buy as many ETFs or stock as I want at zero commission. Traditional platforms charge for each transaction you make. There is a spot rate plus 0.45% charge when buying international costs, but that is pretty normal across many platforms. Signing up and transferring money from your bank account(s) is easy as paying someone via online banking.
There are alternatives like Trading 212, which gives you access to even more shares. However, Freetrade offers new users free shares worth between £3 and £200. Here is my referral link so you and I can get a free share. - Hargreaves Lansdown (HL). This is my Lifetime ISA. I mostly have a Lifetime ISA to take advantage of the 25% government bonus on my deposits. However, the plan is to use it to buy a house in the future and after buying a house, I would still invest in it as a secondary pension pot after buying the house.
There are no Lifetime ISA providers that give you as many options as HL, and this is the reason I chose them. Although past performance is not an indicator of future performance, I found index funds on HL that have consistently outperformed the ETFs or tailored products offered by other providers such as Nutmeg, Moneybox. Besides that, the dealing fee for funds is £0 on HL and since my focus was primarily on investing in funds, I went for this.
How did investing pan out for me in 2021?
What I’ve done in this section is give you the actual weightings (percentages) of my investments and returns. However, I have also assumed that I invested £10,000 throughout the year just to put the weights into context. This assumed £10,000 would mean I made monthly deposits of £833.33 for a year. £500 into my Stocks and Shares ISA and £333.33 into my Lifetime ISA.
I contributed £333.33 to my Lifetime ISA so that I could get to the £4,000 maximum by the end of the tax year.
This is a snapshot of my portfolio a week after the market crash that happened in early December, i.e. this was my portfolio at one of its worse states.
Stocks and Shares ISA portfolio
As you would have worked out, I had a total of £6,000 invested into my Stocks and Shares ISA by the start of December.
My top performer was Tesla (155.41%), followed by Carnival (42.70%). However, because these stocks had smaller weights in my Stocks and Shares portfolio, the weighted returns were 3.67% and 0.31% respectively. The best performer based on weighted returns was the Vanguard S&P 500, which contributed 3.76% to my Stocks and Shares ISA portfolio.
For my Stocks and Shares ISA, the Index Funds collectively outperformed my stock picking abilities. Perhaps if I bought more Tesla or Lucid Group or blah blah blah, I would have done better, but investment does not work that way. I did not decide with hindsight, rather; I based it on expectations.
Second, having 26% of my investments in hand-picked stocks is a pretty risky approach in my books and the returns did not justify the level of risk I took on this occasion. 26% of my portfolio in assets is risky for someone who claims to be a ‘passive newbie’. For that reason, I will invest 10–15% of my portfolio in stocks next year and I will choose fewer stocks.
Lifetime ISA portfolio
Initially, I did say that my Lifetime ISA was meant to be fully based on funds but at sometime in the year I changed my mind. Here was my portfolio:
As you can see, I had a small stake in Boohoo and it did not do well. Initially, that stock was doing pretty well, but from nowhere it started tanking. Now, because I’m very passive with investing, you can imagine how surprised I was when I saw a stock from +20% to -64%. I’ve left it as it is because this was money I did not mind losing.
However, the funds I invested in came to the rescue, with Legal and General Global Technology giving me returns of 35.10% (weighted returns 29.77%). As with my stocks and shares portfolio, the index funds did better than individual stocks.
There is a “pattern” here. My index funds seem to outperform my stocks. I ran a little simulation to see what would have happened if I only invested in the S&P 500 Index (60% of my Stocks and Shares portfolio) and the US Tech Sector (40% of my Stocks and Shares portfolio) for my Stock and Shares ISA and the L&G Global Technology Index (60% of my Lifetime ISA portfolio) and the S&P 500 Index (40% of my Lifetime ISA portfolio).
In this exercise, I’m trying to emulate what would have happened if I invested the same amount I did monthly for a year.
The simulations suggest that if I had just invested in those 4 indexes in that manner, I would have a high chance of getting a very similar performance to what I did this year or even better.
Reflections
I’m going into the following year with a clearer picture of what I am going to do. My investments would be something like this next year.
Stocks and Shares ISA (£6,000)
50% (£3,000) — Vanguard S&P Index
40% (£2,400) — iShares US Tech Sector
10% (£600) — Stocks and SPACs
Lifetime ISA (£4,000)
60% (£2,400) — L&G Global Technology Index
40% (£1,600) — S&P 500 Index
I am also excited because I am going to reap the benefits from the interest (capital gains) on the lump sum I already have, i.e. the assumed £11,100. I’m also going to continue drip-feeding funds into my ISAs monthly. Some people argue that dollar-cost averaging (drip-feeding your investments) limits your exposure to the market, but it also limits your returns. However, investing a lump sum (especially into an index fund) would always return more than drip-feeding investments in the long run. Unfortunately, I did not have that lump sum to just drop into investments.
Aside from the returns, the dollar cost averaging has instilled the habit of investing and discipline in me, so much so that setting aside money every month to invest has become a core habit of mine. If you are reading this and new to investing, I would suggest you drip feed as well.
I am also happy that I’ve documented this journey because it would be interesting to see how my current plans pan out at the end of 2022.
If you are a new or experienced investor, please leave some comments on any ideas or advice you have.
