If you scored 0-19:
Go for a cash ISA

There are several terrible reasons for getting a cash ISA. Among the most popular are spotting a poster while you’re queuing in the bank, or going for what you had last year because you don’t have time to think about it.

However, there are also several good reasons for opting for cash, which is why you’ve fallen into this category.
Tom McPhail, an adviser at Hargreaves Lansdown, says: “The primary reason is time-horizon. I wouldn’t suggest any other kind of ISA if you expect to need your money back within four or five years, because of the volatility of the markets.”

The second great reason is if you don’t already have a cash safety net. The first few thousand shouldn’t be in an ISA, as you cannot dip into it and then top it back up again, so an instant access savings account is your best bet. However, after that, there’s no reason to be paying tax on your savings, so it should be in an ISA.

The third reason to take out a cash ISA is harder to pin down and that’s risk aversion - when you’re not comfortable with the thought of losing money, even in the short term. “You shouldn’t make investments that keep you awake at night,” says McPhail.

However, he stresses that while you won’t lose any money by investing in cash, you could still lose out. “I suspect many people opt for a cash ISA because they perceive it as safer than any other kind. However, we know that the longer you are invested, the higher the risk that cash will be outperformed by equities. Indeed, after 10 years there’s a 90% chance that you’ll be better off with money in the stockmarkets rather than a savings account.”

He suggests that investors consider their attitude to risk carefully before plumping for a cash ISA, bearing in mind factors such as when you’ll need to get your hands on the money and how much you need it to grow.

If a cash ISA still comes out as your best option, it’s worth looking for a competitive rate.

You could also opt for a fixed-rate ISA. These run for between one and five years and offer the security that the rate won’t fall if the Bank of England cuts rates.

If you scored 20-45:
You should look at an ISA containing both cash and equities

Your score means you’re not firmly in the equities or the cash camp – which is fairly normal. There are four factors that push you towards equities or cash: the length of time you have to invest; the amount you already have saved; the amount you have to invest now; and your attitude to risk.

If they all point towards the same thing you’re laughing, but for most people, at least one factor complicates matters. So, for example, you may have a long time to invest, plenty of cash savings, and a reasonable amount to invest – all of which would make you suitable for equity investments, but on the other hand you may be worried about the risks involved with equities.

Alternatively, you may have a long time to invest and you may embrace risk, which would make equity investments a good option. But you have little to invest and little cash savings so far, which would make cash a more sensible option.

If you fall between the two camps, the first step is to question the factor that is out of kilter with the others. If, for example, everything points to equities, and you really can afford to take a little risk, it may be worth facing up to your fear of equities. However, no-one would suggest that you force yourself into this, so if you’re sure, the second step is to establish a balance of some cash and some equities.

From April 2008 there will be more flexibility than ever about how you divide your ISA so you can match your equity/cash split to how many factors point towards each one, and how strongly you feel about it. There may also be practical issues. If, for example, you really don’t have enough cash saved for emergencies, you should be putting the maximum into cash. At the moment, you can invest £3,000, but at the start of the new tax year this will be increased to £3,600.

The equity portion may be your first foray into share-based investments. Gavin Haynes, managing director of Whitechurch Securities, says: “The initial step may be a cautious managed fund, which invests partly in equities but diversifies with lower risk investments such as bonds.”

If an investor is happy to opt for straight equities, most people start with the UK. Ashley Clark, a director at Needanadviser.com, points out: “There’s no currency risk, plus it’s a market people know and understand.” Haynes recommends an equity income fund, because although they had a poor run last year, the potential to reinvest dividends can significantly support a fund in difficult times.

He says: “At the moment, I would look to funds where the manager is very experienced at managing money in good times and bad, like Tony Nutt, who runs Jupiter Income; Neil Woodford, who manages Invesco High Income; and Bill Mott, who runs Cigma Income. They are all good, safe hands.”

If you scored 46-70:
An equity ISA is definitely for you

There are certain things that make you an equity investor. For Tom McPhail it all starts with time-horizon. If you have more than five years it should be on your radar, and if you’re investing for 10 years or more you are better off with equities than with cash in the vast majority of cases.

You do, of course, need the basics in place first. Tom McPhail points out: “If you have lots of expensive debt or no cash savings, these should be your absolute priority. But once you have these, you really ought to consider equities.” For many people, it will depend on their attitude to risk. Equity investors need to be comfortable with taking some risk in order to be exposed to the potential for greater returns.

Advisers always recommend building a balanced portfolio, so what you opt for will depend to a large degree on what you already have. For the beginner, it starts with a cautious managed fund or a UK fund. Once this is in place, you can diversify.

Matt Pitcher, a wealth adviser with Towry Law, suggests your portfolio should include government gilts, UK and overseas corporate bonds, commercial property, and international equities. He suggests a tracker fund for gilts, as investors are looking for exposure to the market rather than outperformance.

Once investors have an asset mix, they can look to diversify the equity part of their portfolio overseas.

If they already have some global exposure, investors can get more specific about their overseas equity diversification. The US has had a dismal run, but as Haynes points out: “It still contains leading companies, and valuations are looking reasonable.”

Then there’s Europe, which Haynes says, “doesn’t have the problems of huge personal debt or a property bubble that the UK has”. And then there are emerging market funds. These, he says, have had a tremendous run of late and some may be overstretched, but still hold incredible potential as the leading lights of the global economy in the long term.

Pitcher points out that, by investing through a platform or fund supermarket, investors can split their ISA into up to seven funds (assuming the minimum investment for each is £1,000). This will enable them to dip a toe into any of these areas that they are not already in, or that they want more exposure to.

If you scored more than 70:
Think about more exotic investments

For the very highest-risk investors, with large portfolios, for whom the ISA allowance is a tiny part of the overall picture, there is a huge range of opportunities to explore, with a speculative approach to money you can afford to lose.

Haynes says there are some specialist funds with potential. These include the Neptune Russia fund, as Russia is tipped as a major growth area for the future. He also suggests sector specialists, such as AXA Framlington Biotech, as the sector has been unloved but could be set for a resurgence, or Jupiter Financial Opportunities if the banks are to see their bad times fade.

Ashley Clark says some of his clients in this position will take a self-select ISA, and “play around with investing in specific stocks they hope will do well. They might use their holiday money for this sort of speculation, in the hope of upgrading their trip”.

Pitcher says once clients have more than £100,000 to invest they will diversify with small margins of the fund, with 2% in assets such as gold, hedge funds and commodities.

And Clark highlights that, if you can afford big losses, you can look to investments that involve a large degree of gearing, accepting that losses may be magnified, in order to potentially profit from equally magnified gains. This may include an investment trust at the higher end of the risk spectrum, which can be held in a self-select ISA.