Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

I was among the first generation of ISA savers. My first fund? An M&G tracker that delivered the performance of the FTSE All-Share index for a charge of just 0.3%.

Back then, that was bargain basement; today, you could pay a tenth of that for the cheapest stock market tracker.

Back in April 1999 when ISAs were launched (exactly 25 years ago), fund investing was new for me. I earned very little and saved very little. I put aside £25 a month in a five-year ‘TESSA’ (Tax-Exempt Special Savings Account) but I wasn’t brave enough, or perhaps I didn’t fully understand the benefits, of backing a ‘PEP’ (Personal Equity Plan). Quite frankly, I was in my twenties and otherwise engaged.

These schemes, in any case, were swept away and we were given a new acronym - the ISA, or Individual Savings Account. This new account covered both savings (Cash ISAs) and investment (Stocks & Shares ISA).

ISAs have been a success - they are not just widely held but are widely trusted. Chancellor Gordon Brown said it was his aim to make Britain a nation of savers again, and it has certainly helped. The number of ISA openings peaked in 2010 but openings have remained robust despite market ebbs and flows, Brexit and the pandemic, as HMRC figures show (below).

Source: HMRC, 22.6.23

A big issue remains - that most people plump for savings - for cash ISAs. Most, it seems, prefer the safety of a known rate but in doing so give up the potential of achieving greater returns.

I would call this a mistake. It’s not one I’ve made, but I have plenty of others to confess. In 25 years of ISA mistakes, here are a few that I’ve made.

Giving up… on an ‘ISA mortgage’ during the market low

In the early Noughties, I bought a flat. In an echo of endowment mortgages of the Eighties and Nineties I was encouraged to take out an ‘ISA mortgage’. As with endowments, the idea was that I could reduce my mortgage payments by going interest-only, leaving some money each month to put into a stock market fund. The money would grow, eventually providing enough to pay off the mortgage, and would do so faster than the traditional repayment route, in theory.

Endowments had been discredited after high charges meant the plans often failed to pay off the mortgage. With ISA mortgages, of course, it would be different.

I never got to find out. The market hit a nadir in 2003 amid the invasion of Iraq and, after two years, I halted and switched to a repayment mortgage.

Was it a mistake? If stock market returns were higher than mortgage costs, then it may have been. The average annual total return for UK shares between 2000 and 2020, when the mortgage was due to end, was 7.9% before charges. The average two-year mortgage rate was mostly between 4% and 5% in the Noughties but far lower in the following decade, with long spells below 4%.

The returns achieved would have comfortably beat the mortgage costs, even with a hefty 1% charge added.

If I’d been more attuned to the merits of diversification and backed a global fund - as opposed to the expensive UK tracker fund that the building society wanted me to take - I’d have been an even more clearcut winner. World shares, according to the FTSE All-World index, made an average annual total return of 12.3% between 2000 and 2020, charges aside.

Home bias and a lack of diversification

‘Home bias’ is the tendency to back your home market. There was a lot of it about in the early Noughties.

What is home bias? As a simple example, consider the makeup of global stock markets. According to the MSCI World index, the US makes up 71% followed by around 6% for Japan, 4% for UK and 3% for Germany. But commonly investors in most countries prefer the familiarity of their own market and stay domestic.

In 2001, British investments made up 72% of British DIY investor portfolios, according to Vanguard. By 2015 it had fallen to 27%, and that trajectory is the same in most countries - we are all becoming more globalised in our investment choices.

Globalised portfolios give us more diversification, which can make the wealth growth journey a little smoother.

Today I’m nicely diversified but consciously overexposed to the UK, which leads me on to another ISA error.

Value traps

Part of the art of successful investing is to buy low. But what is low? A range of market valuation measurements can help, with price-to-earnings ratios perhaps the most commonly cited.

Using such measures, Japan has appeared to be a cheap stock market for decades. You would expect this given the Japanese stock market has only just recovered the anomalous peak it hit in 1989. As a bargain hunter, I have long backed Japanese funds, hoping a re-rating would occur. In the end, Japan has rallied in recent years. But for a long time, I had an opportunity cost for leaving money tied up that could have been working harder elsewhere.

If a cheap market, or investment, is perpetually cheap, with no trigger to spur a re-rating then it can be considered a value trap.

This is the debate around the UK. British shares are historically very cheap and have been since the Brexit vote. On the p/e measure of actual declared earnings (‘trailing’), they are 18% below their average of the last 15 years. When compared to the US p/e, British shares are now half price.

I have been tilting toward UK shares for a while in the hope of a revaluation. So far, that has been a mistake. But perhaps this particular investment story is not yet finished.

Valuation vs 15-year median (% above or below)

Equity market CAPE Forward P/E Trailing P/E P/B
US 31
UK 14
Europe ex. UK 20
Japan 21
Emerging Markets 11


Key: <-25% -25% to -15% -15% to -5% -5% to 0% 0% to 5% 5% to 15% 15% to 25% >25%
  Cheap Neutral Expensive

Note: the other measures in the table, from Schroders, show a smoothed out version of p/e, known as CAPE, as well as price to book value, which compares the estimated value of companies’ real assets compared to stock market valuation.

Being too speculative and being too early

I’ve always been prone to spicing up the periphery of my portfolio - small amounts in more speculative regions and industries. In the mid-Noughties I benefited from a rally in Latin American funds. In the years that followed biotech funds and racier investment trusts, such as Scottish Mortgage, did some heavy lifting. All rallies end, as happened with these ones, and it’s impossible to predict when.

A sensible approach, which I’ve increasingly adopted as time has gone on, is to rebalance the portfolio more regularly, thereby banking gains from speculative winners.

Unfortunately, there were no gains to be trimmed off from two funds I backed that were focused on Africa. One was wound up and the other changed its remit and reduced exposure to Africa. The continent has enormous potential but I was too early.

Raiding my own ISAs

The benefit of ISAs over pensions is that you can access the money whenever you want. That blessing is also a curse. Most of the money I have put into ISAs is with the intention of building a portfolio that can pay me a tax-free salary in retirement. Yet too often there’s been a reason to withdraw - new kitchen, new bathroom, new patio, etc.

As I viewed these as ‘retirement ISAs’, I consider withdrawal to be a mistake. Junior ISAs, in contrast, have the ‘benefit’ that you can’t withdraw. These are being safely handed over to my children, plunder free.

Your mistakes…

You don’t want to dwell on errors but it’s healthy to acknowledge where you can improve. And believe me there are plenty of others I could have detailed here - stopping monthly contributions and forgetting to restart is another classic.

But I must also acknowledge and celebrate that I have made many good decisions. I hope you do too.

This article was originally published in This is Money.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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