Saving into any kind of ISA has a major perk, in that any returns you make will be tax-free. But just because your money is held in an ISA doesn\u2019t automatically make it \u201csafe\u201d. Stocks and shares ISAs carry exactly the same risks as any other type of investment. This includes the risk of your investments falling in value, particularly in the short term. The good news is that there are plenty of ways to manage risks and maximise the chance you\u2019ll end up quids in.<\/p>
No matter where you keep your money, there\u2019s no such thing as 100% safe. Even savings kept in cash under your mattress could be stolen, or wiped out in a house fire. And that\u2019s before we even get started on the inflation risk of keeping all your money in cash. This is where the face value of money stays the same but its buying power declines as the cost of goods and services rises.<\/p>
That said, different ways of saving carry different types of risks. Typically, the higher the risk, the higher the potential reward. Investing \u2013 including in a stocks and shares ISA<\/a> \u2013 typically offers the potential for higher rewards than putting money in a cash savings account (including a cash ISA<\/a>). So it stands to reason that it also puts your money at more risk.<\/p> There are 2 main categories of risk you\u2019ll face if you invest in a stocks and shares ISA:<\/p> We\u2019ll delve into each of these in the rest of this guide, starting with the risk of your ISA provider collapsing.<\/p> The risk of a financial provider failing isn\u2019t unique to stocks and shares ISAs. It can, and has, happened to financial providers of many kinds. These have included plenty of smaller providers, but also (rarely) some big high-street names. One of the most famous of these was UK bank Northern Rock, which failed in 2007 and had to be taken into public ownership by the government in 2008.<\/p> Fortunately, such catastrophic failures are pretty rare. And if a regulated UK ISA provider were to fail, all or most of your savings or investments should be protected by the Financial Services Compensation Scheme<\/a> (FSCS). For firms failing after 1 April 2019, this protects customer assets up to \u00a3120,000 per individual, per firm. Be aware that the FSCS only offers protection in the event of a financial firm failing. It doesn\u2019t protect against the risk that the value of your investments may fall due to poor market performance.<\/p> Investment risk is the chance that your returns on an investment will be lower than expected, including the risk that you may lose money.<\/p> This risk applies to all forms of investment, including a stocks and shares ISA.<\/p> Of course, you don\u2019t invest in the expectation that you will lose money. The idea is that your chosen investments will perform well and grow in value over time. But investment markets can be impacted by a range of factors. Some are unique to individual companies (if they\u2019re poorly managed, or if initial appetite for what a firm is producing or selling wanes over time, for example). Others can affect large swathes of a market (including political upheaval, or global events that affect supply and demand).<\/p> Regardless of the reason, the reality is that financial markets can be volatile. This means that the value of investments can fall as well as rise, particularly in the short term. This is a risk you choose to take when you decide to invest in a stocks and shares ISA. In exchange, you\u2019ll have the potential for higher returns than you\u2019d get from a cash ISA.<\/p> A couple of pieces of good news though. Firstly, you can choose how much risk you want to take. And secondly, provided you are willing and able to invest for the long term (at least 5 years), in most cases your investments should ride out any temporary downturns.<\/p> There are 3 main ways in which you can manage and mitigate how much risk you take with your stocks and shares ISA.<\/p> While investing in general is riskier than cash savings, there is a sliding scale of risk. For example, investing in a fund \u2013 which comprises small slices of lots of different assets \u2013 is typically regarded as less risky than investing directly in individual stocks and shares. We outline some of the main investment types, many of which you can invest in through a stocks and shares ISA, in our introduction to investment risk<\/a>. However, with greater risk comes the potential for greater reward. Opting only for lower-risk investments may limit the size of this potential. If you\u2019re up for taking a bit more risk in exchange for higher reward, this is where tips 2 and 3 can come in.<\/p> You can do this by purchasing different investment types, such as government bonds, corporate bonds, equities (stocks and shares) and funds \u2013 such as exchange-traded funds<\/a> (ETFs). Opting for investment assets in different sectors and geographies can also help. Even if, for convenience, you choose to invest only in funds, try to go for a mix of different fund types. For example, you might spread your ISA across a fund that tracks corporate bonds, another that tracks the FTSE 100<\/a> and another that tracks a completely different market.<\/p> The value of investments can and does go up and down in response to a range of market influences. A stocks and shares ISA is certainly not the right savings vessel for money you\u2019ll need within the next year, or even the next 5 years. That\u2019s because the value of your investments may drop in the short term and not have time to recover. So if you\u2019re hoping to buy a new car in the next couple of years, it\u2019s probably best to pop your money into the best cash ISA<\/a>. If, on the other hand, you\u2019re saving to send your 2-year-old to university, a stocks and shares ISA could be a good way to do so.<\/p> Bear in mind that some assets are more volatile than others, and can fluctuate significantly over very short periods. If you want to invest significant amounts into higher-risk assets, a time horizon well in excess of 5 years may be best.<\/p> If you want, you can select exactly what assets to buy within your stocks and shares ISAs. That way, you can choose the balance of lower to higher risk assets. But if you need some help working out what to invest in that suits your risk appetite, there are a few options.<\/p> The traditional approach is to get advice from a professional financial adviser. But paying for regulated financial advice can be pretty expensive, and may be overkill if you\u2019re only putting a few hundred pounds into a stocks and shares ISA.<\/p> Alternatively, many investment platforms let you pick from a selection of ready-made portfolios<\/a> for your ISA. You just pick the one that sounds like it suits you the best (cautious, balanced or adventurous, for example) and the provider will invest your money accordingly. Some are fairly inflexible about what you invest in, whereas others let you adjust the portfolio if there are elements you\u2019re not keen on.<\/p>What are the risks of investing in a stocks and shares ISA?<\/h3>
Is my money protected if my ISA provider goes bust?<\/h3>
What is investment risk?<\/h3>
How can I manage the investment risk of a stocks and shares ISA?<\/h3>
1. Choose lower-risk investments<\/h4>
2. Diversify your stocks and shares ISA portfolio<\/h4>
3. Invest for the long term<\/h4>
Low-, medium- and high-risk stocks and shares ISAs: How do I choose?<\/h3>