Use your Isa and use it well

A few numbers for you. Let's say you'd opened an individual savings account (Isa) in 1987. From then on, you used your full allowance every year and put the money into the same fund every year a total contribution of £192,480. How much money do you think you would have now?

According to numbers from FundExpert.co.uk, if you had put it into the Fidelity Special Situations fund, you would have £1,160,000. If you had gone for a FTSE 100 tracker, you would have £514,000. If, on the other hand, you had put the money into Scottish Widows Japan Growth, you would now be sitting on a loss of more than £20,000.

There are two lessons here. First, use your Isa allowance (that million-odd quid the Fidelity investor would have made? It's all tax free). And second, use it well.

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The first is clearly a little easier than the second. But this year, there may be hope for anyone still holding Japan funds (we haven't quite been recommending them since 1987, but most MoneyWeek staff have been holding something Japanese in their Isas for a few years now).

The Nikkei 225 is up around 35% in the last three months or so, and there seems to be a good chance that it has further to go. Haruhiko Kuroda, the incoming Bank of Japan chief, has said all the right things about banishing deflation and the falling yen should on Daiwa Securities' estimates push up profits for companies listed on Japan's Topix index by some 20% over the next year.

At the same time, as Peter Bennett of Walker Crips stockbrokers points out, market technicals are "very favourable". Foreign institutions, for all their talk, still have very little money in Japan, while domestic investors have almost nothing in their own equity market.

Japanese pension funds are 88% in bonds and only 12% in equities. It is a similar story for households: some 56% of Japanese household assets are in cash or on deposit (that number is 15% in the US), while a mere 10% is in shares (45% in the US).

This has made good sense for ordinary Japanese people for some time. If there isn't any inflation, not getting much of a positive nominal return on your cash is by-the-by. And deflation is effectively a tax-free rise in income. But if inflation suddenly moves to 1% or 2%, that equation changes. Cash will look very unattractive. And equities trading on very low valuations and yielding 2% (and rising) will look very attractive.