Early bird catches the worm, is the old adage. And rarely has this been truer than when it comes to investing.
Stock and shares investors who delayed until the end of the tax year to use their ISA allowance would have missed out on a whopping £123,000 each over the past 20 years, according to research by financial advice firm Bowmore Wealth.
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Bowmore analysed an individual investing the full ISA allowance, £20,000, into a stocks and shares ISA each tax year. That means up to £400,000 can be saved over two decades.
Investing in a stocks and shares ISA tracking the MSCI Global Index at the start of each tax year would have built up £1.47 million over 20 years – based on the index’s historical performance between 2005 and 2024 of 11%, excluding fees.
By contrast, someone investing the same amount at the end of each tax year would have accumulated £1.34 million – £123,000 less.
“If you expect that the stock exchange is typically going to rise over time, then research suggests that you want to invest a lump sum as soon in the year as possible.”
Benefits of compound growth
One of the main reasons early bird ISA investors do so much better is because investors who delay enjoy less compounding growth – where early gains add on to previous gains and steadily build into significantly larger returns over time.
Many people forget to invest until the ISA deadline – on 5 April – looms, by which point they may have already missed out on months of potential growth.
Incledon said: “By investing early, even modest gains can begin generating strong returns of their own, accelerating long-term wealth growth.
“Those who invest late are much less likely to enjoy strong returns from short-term market growth. By contrast, early and proactive investors take advantage of those months of return, purely because they have more invested.”
Market upticks are often short-lived and very easy to miss if you aren’t already invested. A substantial part of the annual increase in stock markets is often concentrated in just a few days.
However, markets can also experience sharp short-term dips — so while investing early can maximise exposure to growth, some investors may prefer to spread contributions over time to smooth out volatility.
"Missing out on gains when markets rise makes it harder to build a cushion for market downturns,” said Incledon.
“In the end, this should serve as a wake-up call for investors to act early – it pays to get in earlier.”
Cuts to cash ISA
Speculation has been rife in recent months that chancellor Rachel Reeves was planning to slash how much savers could put into their cash ISA, in a bid to get more people investing instead.
The chancellor was expected to announce that the proportion of your £20,000 ISA limit that you can save into a cash ISA will be cut, possibly to as little as £5,000, at her Mansion House speech on 15 July, but that didn’t happen.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “The cash ISA allowance is safe – at least for now. It’s great that the government wants to further consult industry – rather than rushing into a change that would be a real blow for savers and may not get more people to invest anyway.”
The fact that there are no changes slated for the cash ISA in the immediate future means there’s no enormous hurry to fully utilise your allowance right now.
However, the ongoing discussion means you may still want to take advantage of your allowance and snap up a cash ISA, a stocks and shares ISA, or a combination of the two, while you know where you stand.
We look at the best cash ISAs in a separate article.
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