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.

The Individual Savings Account (ISA) turns 25 on 6 April. It has been a huge success, attracting more than £700bn of cash and stock market investments since 1999. More than 22 million of us have one. They will save us around £7bn in tax this year. Around 4,000 people have become ISA millionaires.

It could all have been very different. 1999 was the peak of the dot.com bubble. Within 12 months, the stock market had peaked and begun to fall back, losing around half its value in the three years to March 2003. Plunging markets might have put off a generation of investors in the ISA’s early years.

That they did not is in part due to the way in which the use-it-or-lose-it annual ISA allowance encourages regular saving through the ups and downs of the market cycle. Investors who held their nerve and invested their full ISA allowances in the early years were able to build a portfolio at historically attractive prices. By the time the current long bull market got underway in March 2009, they might have already sheltered just over £70,000 - the annual limit of £7,000 was in place for the first nine years, rising thereafter to today’s £20,000.

Back in 1999, investors were more parochial than they are today. Investing in overseas markets was not mainstream and UK pension funds held the majority of their equity assets in UK shares. So, many investors will have made their initial ISA selections from the UK’s leading shares at the time. How might they have performed had they put those share certificates in a drawer and forgotten them?

Surprisingly well, especially if they had resisted the temptation to spend the dividend income that has always been one of the principal attractions of the UK stock market. A widely held view is that the UK stock market has gone nowhere over the past 25 years, because at the headline level that is what the FTSE 100 has done. But this does not tell the whole story.

A £100 investment in the UK’s blue-chip index on 6 April 1999 was worth just £120 this week, not a great compensation for a generation of stock market risk. But had an investor ploughed their dividend income back into the market throughout the 25-year period, they would have turned that same £100 into £288.

Better still, had they invested in the FTSE 250 mid-cap index over the same period, they would have turned the £100 into £357 on a capital basis, and into £703 with income reinvested. The UK has not been the best performer over the past quarter century, but in total return terms it has delivered a better outcome than it is given credit for. Please remember past performance is not a reliable indicator of future returns.

Turning from the index to individual shares, analysing the performance of the FTSE 100’s constituents in 1999 is not a simple task because only about a third of them have lasted the distance as publicly quoted companies. When I crunched the numbers this week, I was able to find 25-year share charts for just 36 from the original list.

The most striking conclusion from the performance of those shares is how difficult it is to know in advance where the best returns are likely to be found. For example, in 1999 the FTSE 100 was heavily exposed to the UK’s gas, electricity, phone and water utilities. Almost all of these are no longer available to investors, but I suspect that few investors in the final months of the dot.com bubble would have predicted that £100 invested in both Severn Trent and SSE would be worth more than £1,000 today while the same amount in Vodafone would be worth just £94 and £100 in BT would have fallen to under £40. Water and electricity have been better investments than telecoms, despite the late 1990s hype.

The best performers in the FTSE 100 index over the years have been some of the apparently most dull and unfashionable stocks. Consumer staples such as Reckitt Benckiser (Reckitt & Colman back then) and Unilever safely outperformed even the stronger FTSE 250 in total return terms over the period. Sin stocks Imperial Brands and British American Tobacco did twice as well, turning £100 into £1,339 and £1,675 respectively. They benefited from being out of favour and paying a high and sustainable dividend. It turns out that this was a more powerful combination than a presence in the modish telecoms sector.

Also hard to predict in 1999, I suspect, was the massive divergence in performance between the two mining stocks that have stayed the course, Rio Tinto and BHP Billiton, and the two oil majors, BP and Shell. Investing in the oil stocks has turned £100 into £302 and £391 respectively. Not bad, you might think, but a fraction of the £2,226 and £2,196 that Rio and BHP have delivered over the 25 years.

Picking winners within another popular sector for ISA investors - retail - would also have been a challenge. In 1999 you had a big choice of High Street names - Boots, Asda, Dixons, Great Universal Stores, M&S, Sainsbury’s, Tesco and Woolworths. Only three of these are still quoted and only Tesco has even kept up with inflation. A 1999 pound is worth less than 50p today, so you’d need £200 from a £100 investment just to keep your head above water in real terms. M&S has turned £100 into just £143 and Sainsbury has returned £198. The £352 from the same investment in Tesco is better but pales in comparison with a similar bet on Next, which joined the blue-chip index just a month after the ISA was launched and has turned its £100 into £2,610.

At the end of another long bull market, we can learn some important lessons from the first 25 years of the ISA. Valuations matter, especially when the overall market is frothy. The long-term winners are not always what you might expect, so be well diversified. Re-investing your dividends makes a huge difference over a long investment time horizon like this. Even out of favour markets like the UK can deliver good results if you are patient. And, finally, an underestimated investment strategy is sometimes simply to buy and forget.

This article was originally published in The Telegraph.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. 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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