ISA & SIPP management - Tips for active investors

Posted by Stephen Sutherland on Tue, May 29, 2012 @ 01:47 PM

ISA management tips for active investorsIf you’ve read my book Liquid Millionaire, or seen my Top Ten Tips for Successful ISA Investing, you’ll know that I’m not a big believer in a ‘buy and hold’ investment strategy.

My belief is that if your objective is to beat the market averages, then you need to be active. My reasoning behind this is because of the golden rule: Three out of four stocks move in the same direction as the general market.

This means in market downtrends, 75% of equities and equity based funds will fall in value. I’m sure you can imagine the pain you could experience if you were stuck in equities during a major bear market that could last up to three years.

This is the reason I like to be active. When you are active, it means aiming to enter and exit the market – and the funds you choose – at the right time. With ISACO being a specialist in ISA and SIPP investing, I’m going to assume that you have an ISA account and will use ISA management in this example.

ISA management & making a switch

The term ‘switch’ is important to note because I never make buy or sell orders on my ISA or pension account. If you ever place a sell order on your ISAs instead of a switch order, it could be one of the worst financial mistakes you ever make. The reason is once you’ve sold your ISA you won’t be able to put the proceeds back into your ISA account should you ever change your mind.

Let’s look at how switching works and review the three rules I personally use.

Rule 1 – In healthy markets (upwards trend) the aim is to invest into quality investment funds.

Rule 2 – In healthy markets, if your fund underperforms, you have the option of switching into an alternative investment fund.

Rule 3 – In unhealthy markets (downwards trends) the aim is to invest in an ISA Cash Park.

Market cycles are continuous. Bull markets (upwards trends) last between two and four years. During a bull market, I aim to stay invested in quality funds for the full duration of the bull market. After the bull market is over, the bear market will begin.

Bear markets tend to last between nine and eighteen months although some, as mentioned earlier, can last much longer. When I believe a downtrend has been triggered, I 'switch’ into an ISA Cash Park and stay there until the bear market is over. When the bear market has finally run its course, a new uptrend is triggered. This stock market cycle of bull market followed by a bear market, followed by another bull bear and then another bear market, continues forever.

Three types of possible switches

Whilst investing in the market, you will encounter three types of possible switch scenarios:

1) Switch from investment fund into investment fund.

2) Switch from investment fund into ISA Cash Park.

3) Switch from ISA Cash Park into investment fund.

Switch from investment fund into investment fund

This type of ISA management switch may occur when you’re invested in a fund that is underperforming and you want to move into a better choice. When this happens, you can switch from the underperforming fund into an alternative fund.

For example:

  • The market is in an uptrend (bull market)
  • You own Fund A
  • Fund A is underperforming
  • You make a switch out of Fund A into Fund B.

Switch from investment fund into ISA Cash Park

This second type of switch occurs when a downtrend has been triggered. This type of switch will occur when the market has changed its trend from upwards to downwards. When this happens, you can switch from the fund you own into the ISA Cash Park.

For example:

  • The market is in an uptrend (bull market)
  • You own Fund A
  • A downtrend is triggered
  • You make a switch out of Fund A into an ISA Cash Park.

Switch from ISA Cash Park into investment fund

This third type of ISA management switch occurs when the market has changed its trend from down to up. This occurs when you are parked in the ISA Cash Park due to the market being in a confirmed downtrend.

For example:

  • The market is in a downtrend (bear market)
  • You are invested in an ISA Cash Park
  • An uptrend is triggered
  • You make a switch out of the ISA Cash Park into Fund A.

How many switches in a typical year?

If you make too many ISA management changes during a twelve month period, it could eat into your returns. Investing takes time and some investments don’t immediately go higher just after you buy them. Personally I will make no more than one or two switches in a year. During a typical stock market cycle, the bear market ends (downwards trend) and a new bull market (upwards trend) begins.

During the bear market I park temporarily in an ISA Cash Park. As soon as the new bull market starts I switch into a high quality investment fund. I then remain invested all the way through the bull market and would only switch into an alternative fund if my fund was underperforming the general market.

I also remain fully invested in funds during bull market corrections. Bull market correction periods could be anything from 8-25% in depth. Remaining fully invested during these sometimes heavy retracement periods takes tremendous emotional tolerance – but does get easier over time.

A typical bull market normally lasts between two and four years. When the bull market ends and a new bear market starts, I switch out of the fund I own and park my full account in an ISA Cash Park.

Bear markets tend to last for between nine and eighteen months and that means my aim to sit out the bear market and only switch back into funds when a new bull market has begun.

Sitting in cash through bear markets will require faith and patience because it can often become frustrating. This is because just after getting out of the market, you could be itching to get your money to work. However, in bear markets, as you discovered, 75% of all investment funds fall and that’s why the best place to be during a bear market is cash. In bear markets, cash is king.

If you're thinking about how to manage your ISA & SIPP portfolio, then I hope you've found this post helpful. As always, if you have any questions or thoughts on the points covered in this post, please leave a comment below or connect with us @ISACO_ on Twitter.

Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.


ISACO was established in 2001 by brothers Stephen and Paul Sutherland and is the first financially regulated firm to offer adventurous ISA and SIPP investors a unique personal investment service that shares on a daily basis our star-performing investor’s thoughts, personal insights and investment decisions.

Clients enjoy being informed throughout the year what ‘best of breed’ funds our premier investor currently owns, when he’s buying and when he’s moving into the safe harbour of cash – helping clients enjoy more control, manage their portfolio more effectively and benefit from the potential of outstanding long-term returns.

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