Jenny Lowe measures the industry consensus on where is best to invest in 2010.

With interest rates on cash savings at historic lows, it has been argued that investors may do well to consider the risks and rewards of the stock market when it comes to making the most of this year’s ISA allowance.

As ever, the investment goals of the investor are the vital starting point. For example, a 30-year-old investor is likely to have a very different investment outlook to a 65-year-old facing retirement.

For those who are more risk-averse, it is perhaps better to stick with cash ISAs, where capital will be safe and the decision on where to invest the money is based largely on the highest rates. The risk, of course, with a heavy cash strategy is that investors could miss out on the potential growth from the stock market over the medium to long term.

‘With the average cash ISA rate at just 2.12 per cent, it is no wonder that most people looking to invest are steering away from cash in order to get better returns,’ says Nick Scarrett, head of pensions and investments at Fair Investment Company.

In it for the long run
ISAs work best as a medium- to long-term investment, and advisers generally consider a minimum time horizon of five to seven years for investing in a stocks and shares ISA as it exposes the capital to market fluctuations. While this can offer greater potential for both income and growth, following such a strategy does require a degree of nerve, and a conviction that equity markets will continue on the recovery path.

Virgin Money spokesperson Grant Bather explains, ‘Compared with the dark days of March 2009, the FTSE 100 looks transformed, and so do the potential prospects for this year’s ISA season. As quickly as they fled, investors are returning to the market as equities continue on their overall upward trend.’

The FTSE 100 has risen nearly 48 per cent from its low point in March 2009, to close at 5,188.5 at the end of January 2010. This upward trend has resulted in soaring sales of unit trusts, with Investment Management Association figures showing a record net £25.8 billion invested in retail funds in 2009, more than six times the amount invested during 2008.

And, with ISA limits set to be increased to £10,200 for all investors in the new tax year, making the most of the tax-free allowance is more important than ever.

‘With the ability to invest more, consideration should also be given to appropriate asset allocation and investment time horizon,’ Bather explains.

‘By dividing your ISA allowance between cash, bonds and shares, investors can mix the security of cash and the relative safety of bonds with the opportunity for greater returns and growth through shares over the medium to long term.’

The fund option
For those investors who don’t necessarily want to go down the route of picking out individual shares, there is also the option to invest in one or more investment funds, where all investors’ money is pooled and invested on their behalf by a fund manager, whose job it is to maximise returns.

James Daly, investor centre representative at TD Waterhouse, says, ‘One fund that always grabs investor attention is Invesco Perpetual’s High Income Fund. Over the long term the fund has delivered a good performance and manager Neil Woodford is well known and highly respected.

‘Others that are popular this ISA season include Jupiter’s Financial Opportunities fund and the M&G European High Yield Bond fund.’

But with any plan it is important to be patient. Grant Bather concludes, ‘You should have enough money in cash for a rainy day, then invest often and for the long run.

‘Locking your money away for at least five to ten years is the best way to get the most out of your investments and smooth out the ups and downs of the market.’