Investing in stocks & shares ISA- when to make deposits?

Question

To start with, let me say that I am very new to investing- have no prior experience of it...

Last year, I opened a stocks & shares ISA for the first time (it is a Lifetime ISA), and my intention for this money is to put it towards a deposit for my first property (as well as using it to save for retirement)- which I would hope to be buying some time within the next 5 years or so.

I appreciate that this is very short term in terms of investing in the stock market- my reason for opening it was primarily to make use of the 25% government bonus that will be added to its value when I put the ISA towards the deposit on a property (£4000 max annual contribution- £1000 max annual government bonus).

When I first opened the account, I opened it with the minimum value that was possible, and then topped it up to the maximum contribution before the end of the financial year.

The ISA that I opened is an 'automatic' one where the provider does all of the investment for me, based on an assessment of my approach to risk that they carried out using a questionnaire when I opened the account. Over the course of the time that I've had the account open, I have seen its value rise and fall (roughly 5% either way from the amount I initially invested).

Last year, I made my deposits into the account at 'random' times (just when I could afford to), without really taking into consideration whether that was a good time to be making the deposit or not.

This year, I want to try and 'maximise' the deposits I make into the ISA, but I'm not really sure how best to do this/ what to take into consideration, etc before I actually make the deposits.

Some of the things I'm uncertain on would be:

1. Is it best to make a deposit at a time when the stock market is low (i.e. the value of my ISA at this point in time is likely to be less than the value of what I've actually contributed to it)?

2. Is it best to deposit the full amount in one go, or to make smaller deposits at different times?

3. If it's better to make more smaller deposits rather than one large deposit, how can I judge when is good to make a deposit, and how much I should deposit at that particular moment?

I appreciate that some of this might be subjective (i.e. based on an individual's approach to risk, their own personal circumstances, etc), so what I'm looking for here is advice on how I can decide these things for myself?

I am in my late twenties, so can afford to take some risks, and save probably 50-60% of what I earn at the moment.

Answer 1

Philip's answer gives good advice in general, but I would emphasise that for a Lifetime ISA in particular, the government bonus makes putting in a lump sum as early as possible more of a benefit than it would usually be for a normal account.

In 2017/18 (the first year of the LISA), the government bonus was paid at the end of the year, so it didn't matter (for the bonus) when you put money in. From tax year 2018/19 onwards, the bonus is paid on deposits you make each month, however much that is (up to the overall limit, obviously). So if you can afford to pay in £4000 in April, you get the £1000 bonus as soon as April's bonuses are processed (e.g. in May), and that £1000 can start earning interest immediately. If you put the money in at the end of the year, the bonus earns no interest (that year), or (maybe more realistically) if you invest some money each month, only part of the total year's bonus is earning interest throughout most of the year.

This doesn't make an enormous difference, but because the bonus is applied soon after you deposit, it can act as a (small) "force multiplier" to the "time in the market" effect from point 2 in Philip's answer. For example, using the example of 5% growth from the question, you might gain an extra 5% of the 25% bonus (i.e. 1.25% of what you put in), which would be £50 if you invest the full £4000. [Strictly you will get a bit less, as the bonus isn't paid immediately.] Not life changing, but better than not having it if you happen to have the £4000 available to put in in April of each year.

In general MoneySavingExpert has a good article covering the LISA (see #2 under "Lifetime ISA need-to-knows"), although it is a little unclear on the "however much that is" point above. I confirmed the above description of the bonus system with my provider when I was making the same decision.

Answer 2

On #1, If you think you can time the market/work out when it's low you can just make millions off that quickly so wouldn't worry too much about the ISA allowance - just focus on your stock picking skills.

On #2, in pure expected value terms, lump summing the full allowance as early as possible is usually considered correct, as every day in the market is considered to overall have a positive return, so you want as much invested as possible for as many days as possible. However, depending on your risk tolerance it's often considered less psychologically grueling to add it in month by month to potentially lower the variance (see general discussion around dollar cost averaging for more details) and avoid things like lump summing the day before a big crash and watching 20% of your money go up in smoke.

On #3, if you prefer to pay it in slowly over the year you can return to point #1 if you think you can work out the time the market will be low or high, if not just divide whatever your yearly contribution will be into 12 and do that per month and forget about it.

Note you should definitely be lump summing if you pay any transaction costs on your money when you enter or exit funds or shares/ETFs: these eat into small transactions very fast.