5 common ISA investing mistakes beginners should avoid

Investing is a necessity if you want to grow your money over time. The spending power of cash in bank accounts or Cash ISAs tends to go backwards in the longer term because the interest rate paid typically isn’t enough to keep up with inflation consistently.  

For those taking their first steps into investing, and willing to commit for the longer term – meaning five years plus – investing a Stocks & Shares ISA could be well worth considering owing to the tax treatment. Investment gains are exempt from capital gains tax and any interest or dividends from shares is income tax free. 

But if you are a beginner investor or are taking a ‘DIY’ approach, you’ll want to stay informed about everyday investment mistakes to avoid (so you can avoid making them yourself!) 

Stocks & Shares ISA investing mistakes

1. Taking the wrong level of risk

Firstly, it’s important you don’t pick the wrong type of ISA for your needs. If you want the safety and security of cash then choose a Cash ISA, but if you want to harness the potentially higher returns of the stock market, and accept the risks that involves, then opt for a Stocks & Shares ISA – or a Stocks & Shares Junior ISA for a child. 

Getting the balance of risk and return in Stocks & Shares ISAs right can take some consideration and depends on several factors around your individual circumstances – investment goals, timescale and the requirement for income. It will also be shaped by how much volatility (the extent of ups and downs) you are prepared to accept – and this could change over time. 

Take too little risk and your capital may not grow as much as you need it to; for instance, if you are investing towards retirement having a large weighting to low risk areas in your twenties and thirties would seem a wasted opportunity. However, take too much and you could become a victim of market volatility at just the wrong moment. This investment blunder is particularly relevant for investors looking to cash in on their assets in the short term. 

Everyone is different, but if you are more cautious, or have less time to invest, then you’ll probably want to have more ‘balancing’ assets to temper stock market volatility, notably bonds which represent loans to governments or companies. These pay interest to the holder and tend to provide a lower return in the longer term compared to shares but can still do better than cash.  

Diversification, owning a variety of assets whose returns are independent of each other, is the cornerstone of sensible portfolio management. Having all your eggs in one basket might make you a fortune, but it might lose you one too. Combining equities with high-quality bonds is diversification at its most basic, but historically it has been effective in many economic environments and helps you avoid emotional investment mistakes.
 

2. Buying last year’s ‘winners’

Beginner investors are often attracted to top performing funds or shares when they invest in their ISA each tax year. However, buying in without having an idea of why, or whether it offers value relative to similar assets, can be dangerous. In particular, don’t buy a fund just because it is top of its sector over a short time-period. 

It is often surprising how quickly funds flip from the bottom to the top and vice versa. Consider longer term performance and, in particular, returns over discrete years to give you an idea of how the fund has behaved over time. Concentrating too much on past performance can also create a portfolio that has the ‘illusion’ of diversification. The reality is an investment error that’s hard to spot, where you have various flavours of essentially a similar thing rather than a mixture of components with differing characteristics. 

It is important to understand which assets protect you if things take a turn for the worse or you are wrong, and if you don’t have any of these then you should consider them if you are looking to limit volatility.

3. Short-term thinking and trying to time the market

Buying low and selling high is often the aim of market traders. However, investing is different. The objective should either be to use time and patience to multiply your wealth over a long period, or to generate an income from a capital sum. Both these aims are usually best met by staying invested rather than regularly moving in and out of assets. To do so could interrupt the flow of income or undermine the benefits of ‘compounding’ returns over time. 

By all means revisit your strategy and ISA asset allocation from time to time but remember that timing the market is tricky, and you need a very good reason to sell up completely. Sitting tight is easier said than done when markets are falling, but these testing periods are an inevitable and normal part of investing. They happen from time to time, but it’s hard to predict when and why. Yet in the long term, they can also present good opportunities to acquire assets as others despondently sell.

4. Being attracted to the highest yielding investments

Some ISA investors are particularly attracted to investments producing a high level of income. Yet it is also a warning sign. There is likely to be a very good reason why an investment yields so much. Is it a share where the dividend is likely to be cut? For bonds, higher yield means higher risk – there is more chance of default and capital loss. 

Yields are often based on past pay outs and therefore may not be a good indication of the coming year’s income. In some case they may not be accurate at all, especially for shares, as dividends can be cut, deferred or cancelled altogether. Over the long term, it is often better to opt for a company share with a lower pay out that has good potential to grow it rather than the highest immediate income. 

5. Not using tax shelters

One of the costliest mistakes is not to use an ISA, or another tax wrapper, at all as it makes good sense to take advantage of your annual allowances as far as you can. Even if this isn’t relevant to you in the shorter term your tax position may change in the future. Many investors have built ISA portfolios worth hundreds of thousands of pounds, a sizable nest egg sheltered from capital gains tax and income tax. 

The 2025/26 tax year ISA allowance is £20,000 and there is no extra cost involved with investing in our ISA compared to a non-ISA Investment Account. As well as contributing lump sums you can add to your ISA monthly, which can help smooth out uneven stock market returns. 

Find out more about Stocks & Shares ISAs in Erica’s video on our YouTube channel here. 

If you are investing for retirement, then a pension is likely to be an even more tax efficient route as it is possible to receive tax relief on contributions of up to 45%. However, an ISA provides more flexibility to access money when needed. The tax treatment of pensions depends on individual circumstances and is subject to change in future.

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