Why your Stocks and Shares ISA might be losing money

Investing in a Stocks and Shares ISA can be a great way to grow your savings over time, but seeing your account value drop can be unsettling. If your ISA has lost money, don’t worry, you’re not alone. Market fluctuations are perfectly normal.

Understanding why this happens is important for making informed decisions about your investments. In this article, we explore why your Stocks and Shares ISA might be losing money, the risks involved, and strategies to protect your investments.

Is my ISA really losing money?

Investment values often rise and fall over time, and these changes only become real losses if you sell your units when they’re worth less than you originally paid for them.

While your money remains invested, its overall value will fluctuate with market conditions. Prices may fall further in the short term, but they also have the potential to recover and grow again. This is considered a normal part of long-term investing.

It can help to remind yourself why you opened your ISA in the first place. If your goal is long-term saving, short-term dips shouldn’t derail your plan. What matters most is how your investments perform over the full duration of your investment journey, not over days or months.

However, understanding why your ISA’s value changes can also make these fluctuations feel less daunting. By recognising the factors that influence performance, you can make more informed decisions and stay confident in your long-term investment strategy.

Common reasons why your Stocks and Shares ISA may lose value

While Stocks and Shares ISAs can offer higher returns than cash ISAs, they come with inherent risks that can cause your account value to fall, which is why you will see ‘Capital at Risk’ warnings in relation to these types of products.

Losses usually only become permanent if you sell your investments (or units) for less than their purchase price. 

The main factors that can lead to a Stocks and Shares ISA losing value include market volatility, underperforming investments, and management fees.

Market volatility

One of the main reasons a Stocks and Shares ISA can lose money is market volatility. The stock market is unpredictable, and prices of shares, funds, and other assets can fall for a variety of reasons. Global economic events, political instability, interest rate changes, and company-specific issues can all cause market swings.

Poor investment choices

Another factor that can lead to losses is selecting poor-performing investments. Not all funds or shares deliver strong returns, and some may underperform the market or even lose value. Choosing investments without proper research or relying solely on past performance increases the risk of losing money.

Find out more about the Unity Mutual Equity Fund in which our Stocks and Shares Flexible ISA is invested.

Fees

Charges associated with Stocks and Shares ISAs can also impact returns. Management fees, platform fees, and fund-specific charges may eat into your profits or even contribute to losses during periods of poor performance. These fees and how they are structured can vary from provider to provider.

• Platform fees: An annual fee charged by your ISA provider for using their service, usually calculated as a percentage of your portfolio.
• Fund management charges: A yearly fee applied by the fund manager for handling the investments within the fund.
• Trading fees: Fixed charges incurred each time you buy or sell shares or other investments. Frequent trading can cause these costs to accumulate quickly.

It is important to carefully consider fee structures when selecting a provider or individual funds. Our managed Stocks and Shares ISA is fully transparent, with no platform or trading fees, and charges are deducted directly from the fund rather than from the individual.

Economic and interest rate factors

Economic changes and bank decisions can impact the value of your Stocks and Shares ISA. For example, when interest rates rise, some shares may become less appealing, as borrowing costs go up, and investors may prefer safer options like bonds.

Similarly, inflation can affect the real value of returns. Even if your ISA grows in nominal terms, high inflation may reduce your purchasing power, effectively meaning your money has lost value.

Scenario: Nominal vs real returns in an ISA

Let’s say you invest £1,000 in a Stocks and Shares ISA. After one year, your investment grows to £1,050.

That’s a 5% increase in nominal terms — meaning your money has grown by 5% based on the actual amount shown in your account.

But if inflation was 3% that year, your real return (the increase in your purchasing power) is only about 2%.

Find out more about Unity Mutual's fund prices and how they have performed over the last 12 months.

Short-term investing risks

Stocks and Shares ISAs are often most effective as long-term investments. Short-term investing increases the risk of losses due to temporary market fluctuations. Investors who need quick access to funds may be forced to sell their units at a loss during a market downturn.

Holding your units over the long term helps smooth out market volatility, giving funds and assets time to recover from temporary declines. Those who withdraw too early may lock in losses rather than allowing their stocks and shares to grow.

Behavioural factors

Frequent withdrawals, or chasing short-term gains may increase risk and reduce overall returns. Unlike a Cash ISA, a Stocks and Shares ISA is designed for long-term investing and shouldn’t be treated as a short-term savings account.

How to reduce the risk of losing money

While you cannot get rid of the risk of losing money on your Stocks and Shares ISA altogether, there are ways to manage it effectively:

• Diversify your portfolio: Balance your money across different types of investments to reduce to reduce the impact of poorer-performing investments, for example, you could consider opening a fixed rate bond.
• Consider your time horizon: Stocks and Shares ISAs are generally better suited for long-term investing. A long-term perspective allows your investments to recover from short-term market drops.
• Stay informed: Keep track of your investments, market trends, and economic news. However, avoid making impulsive decisions based on short-term fluctuations.

How to Manage Your ISA During a Downturn

Take a long-term perspective

A Stocks and Shares ISA is intended for long-term investing, usually five years or more. Market dips are normal, so try to avoid panic selling during periods of decline, as this can lock in losses that might otherwise recover over time.

Invest regularly through pound-cost averaging

Contributing a fixed amount at regular intervals means you buy more units when prices are low and fewer when prices are high. Over time, this approach can help reduce the average cost of your investments and smooth out market fluctuations.

Review your risk profile

Make sure your investment choices still match your financial goals and tolerance for risk. You may want to consider reviewing your investment strategy with an independent financial advisor, visit unbiased.co.uk to find independent advice.

Keep an eye on fees

Platform fees, management charges and fund fees can eat into your returns, especially during periods of market downturn. Regularly review what you are paying and consider lower-cost options if appropriate.

Should I cash in my Stocks and Shares ISA?

Deciding whether to cash in your Stocks and Shares ISA is an important decision and should not be based solely on short-term market fluctuations. Remember, you only lock in a loss when you withdraw your investments while their value is below what you’ve contributed.

Things to consider before cashing in:

• Your investment goals: Think about why you invested in the ISA in the first place. If your savings are intended for long-term goals like a future purchase, short-term dips shouldn’t dictate your decisions.
• Market timing risks: Trying to “time the market” by selling during a downturn can mean missing out on potential recovery and long-term growth.
• Investment horizon: Stocks and Shares ISAs are designed for growth over several years. A long-term perspective helps smooth out temporary market fluctuations and allows compound interest to work at its best.
• Alternative options: Instead of cashing in, consider rebalancing your portfolio, diversifying your investments, holding your position until the market recovers, or allocating some funds to safer options like fixed-rate bonds.

Cashing in your ISA should be a strategic decision aligned with your personal financial goals, not a reaction to temporary market movements. Monitoring your investments through tools like Unity Mutual’s My Policy Value page can help you make informed choices without panic.

Turning losses into learnings

If your Stocks and Shares ISA has dropped in value, don’t panic. Short-term dips are completely normal. You only lock in a loss if you sell your investments for less than you paid. Market fluctuations can be caused by company performance, sector trends, broader economic events, or even unexpected shocks like COVID-19.

The key is to keep a long-term perspective. Stay focused on your original investment goals, review your risk level periodically, and ensure your portfolio still aligns with your comfort zone. By staying invested and informed, you give your ISA the best chance to recover and grow over time.

If you have questions or need assistance with your ISA, Unity Mutual is here to help. You can visit our Help & Support page, call 0161 214 4650, or email us at insure@unitymutual.co.uk with your query.

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