Five ISA lessons that nobody taught you at school

Rachel Lacey reveals some investing lessons you probably didn't learn during double maths on a Friday.

Whether you look back on your school days with fondness or horror, chances are you didn’t learn much about personal finance or investing.

We hopefully learned how to add up and string a sentence together, but we may still struggle to explain how quantitative easing works or to work out how much tax we owe at the end of the tax year.

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In reality, many of the skills we learned at school are relevant to our everyday lives and our investing journey. Percentages, for example, suddenly become a lot more relevant when we’re checking if our pay rise will beat inflation.

Here then, are five lessons from school that may be more relevant to investing than first appears.

1) Business studies

Business studies teaches students how companies are run and what will make them profitable; it will give an insight into economics too. That’s a great grounding if you want to start researching companies to invest in. But, you don’t need a GSCE or an A-level in business studies to pick the right investments. By investing in an actively managed fund, you can get access to a portfolio of shares hand-picked by a fund manager. Or, if you go for a passive fund or exchange-traded fund (ETF) you can get exposure to all the components of an index such as the FTSE 100 or S&P500.

2) Maths

While you’ll always need to decide where to invest your ISA allowance, picking the top-performing share or fund isn’t as crucial to investment success as you might think. For many investors, it’s time in the market and regular investing that are the real drivers of growth – concepts you might wish your maths teacher had explained.

The longer your money is invested in the market, the more it stands to benefit from compound returns, where your returns start working for you and earning money themselves. Take a £500 investment that earns 5% a year. In year one, it will make £25, giving you £525 for year two, which assuming the same rate of return, earns you £26.25, giving you £551.25 to kick off year three. The boost might not look much but as the years roll on this compounding becomes more impressive. After 10 years, that £500 is worth £823.50 and by that final year the annual return had risen from £25 to a little over £40. However, to reap the benefits of compounding you need to leave your money undisturbed and reinvest your dividends.

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Of course, your money will grow faster if you keep topping it up. By investing regularly and drip-feeding your money into the stock market, you get to take advantage of another mathematical phenomena: pound-cost-averaging. This is where you buy shares or units in a fund at a different price each month, paying an ‘average’ price over time, unlike a lump sum investment where you get your whole holding at the same price.

Regular investing and pound-cost-averaging can help investors in a number of ways. First, it provides smoother returns – you reduce the risk of a big loss if markets fall quickly after you invest and second, because you get to buy more units when prices are low, you’re putting yourself in the best position to profit from a recovery. But finally – and perhaps most importantly – payments are made automatically by your platform provider and you are freed from concerns around timing the market. Trying to accurately time the market is difficult and in many cases it puts investors off and means their money ends up with less time in the market as a result.

3) Drama

When it comes to politics, especially in Westminster, current affairs can play out on the stock market like a Greek or Shakespearian tragedy. But just as actors need to learn to cope with stage fright and not get distracted by their audience, investors need to be able to deal with drama and filter out ‘market noise’. Unfortunately, it’s a skill many an investor needs to work on. According to the Investment Association (IA), last year’s market dramas prompted us to make record withdrawals of £25.7 billion, making 2022 the first year that we took more money out of our investments than we paid in.

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Although cashing in investments during turbulent times might make you feel better in the short term, it rarely helps in the long run. By taking money out of the market before you’d intended, all you will do is lock in losses and remove any opportunity to benefit from the inevitable recovery.

4) Geography

Understanding how oxbow lakes are formed might not help with your investment skills, but a global vision and an awareness of geopolitics, the climate and the environment might inspire your investment decisions and help you spot trends.

But at a more basic level, it’s also important for investors to think about geography in terms of the countries they are invested in and getting diversification on a global scale.

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Global funds can be a helpful way of getting instant diversification – but it’s important to know just how your fund is composed. Is it focusing on highly developed markets such as the US and Europe, or riskier economies like emerging markets? Rather than picking out a global fund, you might prefer to take more control of the economies you’re invested in by building a portfolio of regional funds; from the UK, Europe and US, through to Japan as well as developing countries including Brazil, India and China.

5) History

A strong grounding in history can be crucial in helping us to understand the world we live in and why things are the way they are. Investors are all too frequently told that they shouldn’t put too much stock in historical performance, but while this is undoubtedly sensible advice, the ability to look back can be a valuable benefit to investors. When markets are volatile it’s natural to panic and worry about losses, but taking a long-term view and looking back over previous stock market crashes can be helpful in calming investors’ nerves and provide helpful and much-needed perspective.

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Your ISA revision notes

• Each year you can invest £20,000 in ISAs – this is your ISA allowance
• You get a new ISA allowance on the 6 April each year, if you don’t use it by 5 April the following year, that allowance will be lost. You cannot carry forward unused allowance from previous years
• No tax is payable on money held in ISAs (either as it grows or when you withdraw it)
• You can access money whenever you need it
• You don’t need cash to invest in an ISA. Bed and ISA rules allow you to sell investments in a trading account and immediately buy them back within an ISA, enabling you to shelter more of your wealth from tax
• You cannot invest in more than one type of ISA each year. So while you can spread your allowance across a cash ISA and a stocks and shares ISA, you can’t pay into more than one cash ISA or more than one stocks and shares ISA
• If you die, your ISA can be passed to a spouse or civil partner tax free (this is permitted by a temporary increase to their ISA allowance that is equal to the value of your ISA)
• You can transfer your money from one ISA to another, without using the current year’s ISA allowance. This can be helpful if you find a cash ISA that pays more interest, or a stocks and shares ISA with lower charges
• Children get their own £9,000 ISA allowance, but they can’t access their Junior ISA until they’re 18.