Some Nisa investment options

There were some interesting statistics in the Daily Telegraph recently, which amongst other things, pointed out that eight out of ten of the 23 million Isa investors choose cash accounts rather than opting for stocks and shares Isas.

With the New Isas – or Nisas – now launched, there are more opportunities than ever for investors. However, for the majority who choose cash accounts, they are likely to be disappointed as several banks and building societies have been quietly reducing their already low savings rates.

It has to be said that whilst there is a place for cash in an investment portfolio, and whilst it is often perceived as the safer option, one thing is pretty much a certainty – the value of your money will fall as it is eroded by inflation over time. There are plenty of statistics around that show how cash investments fall in value over time whilst equity investors have profited over the long term.

So the alternative of a stocks and shares Isa should perhaps be considered. Whilst this may be perceived as a risky option by some cash Isa investors, it all depends on the investments you choose to buy within the Isa. A good choice for many could be an equity income fund, which holds a selection of shares that pay dividends. If those dividends are reinvested every year, you can do extremely well, even when the share prices remain static.

The benefits of compounding have long been recognised by many long-term investors. It was Albert Einstein who said that “compound interest is the eighth wonder of the world" and who are we to disagree? Certainly, reinvesting dividends instead of relying solely on capital gains makes sense and as dividends continue to accumulate, on both the original shares and the shares gained from previously reinvested dividends, a snowball effect comes into play, leading to potentially excellent  returns.

In addition, there is another level of compounding, that of dividend growth. As dividends are reinvested to purchase new shares, both the original shares and the newly purchased ones all benefit from the higher dividend, leading to a form of "double compounding."

For those still a little averse to putting their lump sum into stocks and shares, a more cautious approach would be to invest the lump sum in 12 monthly payments. This means that when equity prices are high, your monthly contribution will buy fewer shares or fund units but when prices are low, you buy more shares or fund units.

This technique is known as “pound cost averaging” and it takes the worry out of investment decision-making. It means that you need not panic when the stock market falls because you will simply be buying more of your chosen investments. In addition, because you are committing funds on a regular basis you don’t need to worry about investing all your savings at the top of the market either.

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