How I’d invest £20k in a Stocks and Shares ISA

This Fool gives his advice on where he would invest £20k today.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

ISAs are an excellent tool for long-term saving. At the time of writing, savers can put away £20,000 a year in a stocks and shares ISA, and invest this money how they wish.

There’s no income tax or capital gains tax applicable on any income or profits generated on the money inside an ISA wrapper. You don’t even need to declare it on your tax return.

Every single investor can benefit from opening an ISA. And if you’re planning to do just that, but don’t know where to invest your £20,000 savings pot, I think there are a couple of rules you should follow.

Slow and steady wins the race

Firstly, even though profits and losses inside an ISA are not subject to capital gains tax, I think it’s sensible to concentrate on buying investments for the long term, rather than trying to pick short-term bets. Yes, you might make more money by trying to trade the market, but as the ISA contribution is limited to just £20,000 every year, you cannot replace any money if you end up making a losing trade.

The best way to maximise your ISA allowance is, in my opinion, to focus on attractive long-term buy-and-forget investments.

With this being the case, I think it’s probably best to concentrate on picking blue-chip dividend stocks, or if you aren’t comfortable chosing single stocks, buying an FTSE 100 tracker fund might be a better option. Other options are available, including investment trusts, which cost a bit more, but offer a higher level of income.

Personal preference

The amount of money you devote to blue-chip stocks will depend on your own investing preference. I believe it could be best to devote the bulk of your £20k investment to these companies.

At the same time, it could be a good idea to target high growth stocks as well, although I don’t recommend trying to pick these stocks yourself. It’s better to choose a fund run by an experienced small-cap investor. Doing so will give you exposure to small-cap companies, which generally produce a better return than blue-chips over the long term, without exposing yourself to the risk of permanent capital impairment.

If you’re happy to have your entire ISA invested in stocks, I recommend investing around 75% in blue-chip stocks and 25% in small- and mid-cap companies (via funds).

If you’re not too comfortable with such a high allocation towards equities, bond funds can be added to the mix as well. Replacing the 25% allocation towards small- and mid-cap companies with bonds would impact long-term returns, but it would also reduce volatility.

The income option 

At the moment, blue-chip stocks offer a higher level of income than most bonds. So, if it’s income you’re after, it might be better to have more money in blue-chips than bonds. Although, at the end of the day, the allocation you decide on really depends on how comfortable you are owning certain investments.

Personally, I’ve adopted the 75% blue-chip and 25% small- and mid-cap allocation. I’m satisfied with this level of risk and believe it will produce the best returns over the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »