If there’s one silver lining to the horribly dark coronavirus cloud, it’s that some of us have been able to save money while working from home. In fact, a survey conducted by Aldermore Bank last year found that those prevented from making the daily commute saved an average £110 per week! I’ve been able to save but the question is, what should I do with this money? The answer is that I’m buying what I think are the best UK shares. Here’s my strategy.
Before reading on, let me make one thing clear. I wouldn’t dream of investing a single penny of lockdown savings into the stock market if I didn’t already have a cash buffer to begin with. With the outlook on the economy murky at best, a financial safety net for dealing with life’s little emergencies is vital. I’d say the same thing even in good times.
Clearly, exactly how much cash a person keeps in reserve will depend on their circumstances. The typical suggestion is between three and six months’ worth of outgoings. But my simpler rule of thumb is whatever allows me to sleep at night.
Buying the best UK shares
Now that my cash savings are in place, I’m throwing the remainder at the stock market. Although opinions will naturally vary on what the best UK shares are at any point in time, I’m using the following criteria.
- Profitable (no glitzy, loss-making US IPO stocks for me)
- No/low debt (a robust balance sheet means a company is less likely to tap its investors for cash in a crisis).
- A competitive advantage over rivals (such as easily-recognisable, high-quality brands)
- Likely to grow organically in the years ahead
- Large market share (leaders in niche markets are particularly attractive)
- A history of generating high returns on the money management invests (a.k.a ROCE)
- A steadily rising dividend would be nice (although size isn’t as important as consistency)
Valuation isn’t mentioned at all. This isn’t because I think it’s irrelevant (after all, no stock is worth buying at any price). It’s more to do with my acceptance that the best UK shares rarely appear at ‘sale’ prices. When they do (such as last March), it’s not often for very long.
I’d always use an ISA
How much money I can make from investing my lockdown savings rests on a few things. These include how much I put to work and what I choose to buy. Both depend on my attitude to risk and how long I plan to stay invested. What’s right for me might not be right for someone else.
Were I less inclined to pick stocks, then a more passive approach might be appropriate. This would take the form of buying shares in funds that track indices or major themes. An alternative would be to let a group of consistently successful fund managers make decisions on my behalf. There’s nothing wrong with combining both approaches either.
Regardless of which option I choose, I really do need to hold everything within an ISA. Investing my lockdown savings this way ensures any profits I make are wholly mine. I’ll pay no capital gains tax on my winners and no income tax on any dividends. This will make a massive difference to my returns over the next few decades.