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Those planning to start an ISA in 2025 are likely to face more uncertainty than in most years.
Interest rates are high, we are just a few years away from a stock market crash, and economic growth appears shaky.
Today, I look at three common ISA strategies.
1: The safe path
The safest approach has to be to opt for a cash ISA, especially with the current best interest rates of around 5%. With UK inflation at 2.3%, a cash ISA means a positive return in real terms. At least for now.
I can understand why investors who want to minimize risk might put all their money in one. And I know a lot of people who do it. But I see that the appeal will only be short-term.
The problem is that cash interest must fall when Bank of England rates fall. And over the long term, cash ISAs have struggled to keep up with inflation.
2: Joint investments
The UK stock market has returned a long-term average of around 4.9% above inflation. However, that is full of ups and downs, and the crisis of 2020 showed how difficult some years can be.
Is there a way to equalize risk without having to spend years of in-depth research? The easiest thing is probably to buy an index-tracking fund and try to match long-term stock market returns that way.
However, regardless of how we do it, a stocks and shares ISA could be very volatile at times.
To focus a little more, I prefer an investment trust and chose to put some City of London Investment Trust (LSE: CTY) shares in my stocks and Shares ISA.
Champion Dividends
The trust invests in HSBC Holdingsand I like banks. But if the financial sector faces another crisis, it will also Shell. What, a drop in the price of oil or a purchase of renewable energy? Good, BAE Systems should offer some immunity against that.
It continues to make a wide range of investments in some of the UK's strongest long-term companies. It's about diversification.
There is still risk. If the City of London fails to continue its 58-year streak of dividend increases, for example, the share price could fall. In fact, he failed to match the overall result. FTSE 100 recovery since the crisis of 2020. But after 20 years, things are looking good.
3: choose yours
The ultimate practical approach is to choose our own actions. That may mean rolling up our sleeves, digging into company accounts and learning what makes our companies tick.
Well, that's what big investors like billionaire Warren Buffett do. Each of us must decide how much effort we want to put in.
I check the annual and interim results and make my assessments based on my favorite measures. This is mainly a decent progressive dividend, covered by sufficient earnings, from a company with little or no net debt.
The best of all worlds
What is the best approach? I think all three are worth considering, with emergency cash in an easy-to-access Cash ISA.
So my long-term money is split between investment trusts and individual shares, with diversification as a key goal.
