In his recent Budget announcement the Chancellor of the Exchequer has remapped the ISA landscape. He’s created a New ISA (NISA) by merging cash ISAs and stocks and shares ISAs. From 1st July 2014 it will be possible to switch from stocks and shares holdings in an ISA to cash holdings in an ISA.  Now this is a great move that adds plenty of flexibility but it might throw up an unintended consequence.

There have been plenty of studies done on investment returns and investor returns. Perhaps the most famous is the Dalbar’s Quantitative Analysis of Investor Behavior study from the US. Completed annually since 1994 it covers investment and investor returns over the preceding 10 years. Time and again they find the three biggest destroyers of personal investment wealth are:

• buying high, selling low
• not being sufficiently diversified
• trading too often

The New ISA rules may well exacerbate these tendancies. Imagine the market goes down sharply (as it obviously will – markets can fall as well as rise). Investors in equities in a New ISA (without the disciplined framework that enables them to ‘sit tight’ whilst the market recovers) would be able to switch out to cash. Thereby turning paper losses into actual losses. This can’t happen at the moment. Although there’s nothing to stop a stocks and shares investor encashing their ISA investments if the market goes down.

Our role as financial planners is to be aware of these wealth destroyers and to protect our clients from them. We provide them with the financial (and emotional) expertise to stop them making decisions they regret. We do an extremely good job of it too but we can’t help everyone. I’m not sure George Osborne has thought of that.

To find out more about how we can introduce clarity and discipline into your investments why not say hello.