Play the long game and reap the reward

If you are planning to invest in a stocks and shares ISA, you need to make a few important decisions within the next three weeks.

If you are planning to invest in a stocks and shares ISA, you need to make a few important decisions within the next three weeks.

First of all, you should ask yourself whether you're going to stick with UK blue chips or try your luck in the emerging markets. And how are you going to buy your ISA? Will you be visiting your building society or a fund manager, or buying online?

These are important considerations, but you should start with the most important of all: do you want to devote your ISA allowance to shares, cash, life insurance, or some combination of the three?

Maxi ISAs allow you to save up to £3,000 in cash, to invest up to £3,000 in stocks and shares, and to put £1,000 into a life insurance policy. However, you can devote the entire £7,000 allocation to stocks and shares if you choose. If you opt for mini ISAs, the investment limits will be the same, but they will be separate products.

Most investors will discount the insurance option. The low investment limit for the insurance component of the ISA deters many people. Insurance policies need to be held for a considerable period of time; most investors would prefer to have their money invested in equities if they are going to hold the product for several years.

For basic-rate taxpayers, the benefits of a cash ISA are more obvious than those of a stocks and shares product. If you put your money into a cash ISA, you receive interest tax-free. If you invest in stocks and shares, you will not be taxed on your gains, but very few people would be in any case since the capital gains tax (CGT) threshold is £7,200 for 2000-01, increased to £7,500 for 2001-02. But it is still worth using your ISA allowance as in 10 years' time your investments may have grown significantly, so avoiding CGT becomes important.

If you do not need to access your money regularly, and you wish to save for the long term, you should consider a stocks and shares ISA. The markets may not be booming at the moment, but history shows that over a five- to 10-year period, equities will almost always outperform cash.

Having said that, the FTSE 100 has slipped well below the 6,000 mark to levels last seen two years ago. The UK's techMARK index of technology stocks slipped from 5,600 a year ago to 2,176 earlier last week, and the Nasdaq index has fallen by almost 60 per cent over the past 12 months.

However, since an investment in the stock market is a medium- to long-term consideration, what is happening in the market at the moment should not concern investors too much. While analysts are far from convinced that the worst of the market turmoil is over, this could be seen as a good time to buy, since many good companies are now trading relatively cheaply.

One way of protecting yourself against market volatility is to invest through regular savings, rather than commit a big lump sum to your ISA. Most ISA-able funds allow you to invest as little as £50 a month through a regular savings plan.

Another ploy is to buy conservatively. Opt for a fund concentrating on UK blue chips, such as Fidelity UK Growth or Save & Prosper Premier Equity Growth. Alternatively, a general international fund such as Merrill Lynch's Global Titans or Foreign & Colonial's international investment trust is unlikely to disappoint long term.

Do not assume buying an index-tracking fund is the safest option. In times of market turmoil, it tends to be wiser to look for an investment manager with a reputation for stock picking. Nigel Thomas, who runs ABN Amro's UK Growth fund and its newer, more aggressive UK Select Opportunities fund, and Anthony Bolton, who runs Fidelity's European fund, both have strong reputations for picking good stocks.

If you want to be more adventurous, do not dismiss technology out of hand. Investors who bought specialist technology funds this time last year have had a rough ride. But they bought at precisely the wrong time, when the market was riding high. Now the best firms in the technology, media and telecoms sector look cheap. According to John Spiers at independent financial adviser Bestinvest, savvy investors with a greater appetite for risk "should use this period to increase technology weightings".

But investors should be wary of healthcare funds. The healthcare and biotechnology sectors have performed relatively well over the past year, and many fund managers have been marketing these funds to investors. However, for most small investors specialist healthcare funds are not appropriate - they are too risky.

If you need help selecting an ISA, but do not want to consult a financial adviser, try Bestinvest's online ISA planning tool, which can be found at www. bestinvest.co.uk/portplan1.htm.