What should you do with short-term ISA cash?

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Pile of pound coins

There's the age-old question of whether it's better to hold back some ISA cash for when you spot an unmissable bargain, or stay fully invested. I reckon most private investors would be better with the latter.

Over my investing career, the number of times I've thought "Wow, I must buy some of these shares, now" is very close to zero. Many times I've spotted something and thought it a compelling bargain, but my long-term success rate at spotting obvious grab-it-now shares runs at probably around 50%, which is no better than random!

At today's ultra-low ISA interest rates, keeping cash in an ISA means you lose out on the returns you could be getting from shares. If you just bought National Grid shares, you'd earn around 5% per year in dividends, or there's 6% on offer from BP.

You can still switch

Even if you do keep your ISA fully invested, that doesn't mean you can't dip into the odd bargain that comes up from time to time. If your ISA allowance is not fully used yet, you can just keep making monthly contributions to it until you have enough for a new purchase -- and that gives you more time to fully investigate your short-term hunch.

My only recent example is Sirius Minerals, which I'd been keen on for some time. I finally bought some this month, at a slightly higher price than when I first started looking -- but I see it as less risky now, and the time I waited and pondered was time well spent.

Even if you have no spare ISA capacity, you can still go for those occasional sure-fire bargains if you see them, by selling a portion of one of your other investments. That might sound like a diabolical idea to many, but dealing costs are actually very low these days, and if you do it only rarely it could be a good option.

If you have a big investment in, say, BP and you think some would be better in a hot new growth share, then moving the cash could be the right thing to do -- selling when there's a better opportunity is a key part of successful investing.

What to do with cash?

If you have ISA cash ready for a new investment, but there isn't an obvious new share you want, what should you do? Especially if you're keen on watching for any short-term opportunities?

I can only speak for myself, but I'd top up one of my existing holdings. I'd look for one paying solid dividends, and one with a narrow buy/sell spread to minimize any costs associated with switching to something new later -- and that would pretty much tie me to FTSE 100 shares.

Of my current holdings, the one I'd top up would probably be Aviva, although I might go for Lloyds Banking Group. Both are paying decent dividends, and I think both are undervalued -- though Lloyds is probably the more volatile of the two and the one less suited to a possible short-term switch. Other utilities, like SSE, or maybe even a depressed housebuilder like Taylor Wimpey, are among those I'd consider for a bit of spare ISA cash too.

And if you don't spot that quick bargain, you'll probably enjoy better returns from being fully invested.

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Alan Oscroft owns shares of Aviva, Lloyds Banking Group, and Sirius Minerals. The Motley Fool UK has recommended BP. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.