One of the most powerful tools a UK investor has at their disposal is a Stocks and Shares ISA. With £20k of tax-free investing every year, it’s possible to really maximise the benefits of a portfolio growing, and really build some long-term gains.
For some Stocks and Shares ISAs, there will only be a choice of three or four different products, such as a conservative or more risky group of stocks or bonds. But for many, investors will need to manually select which investments to make.
I have three key elements I always stick to when building a portfolio. I’ll be doing the same for my ISA in 2023.
1) Quality at fair value
The stock market is all about finding opportunities to buy quality companies for less than they’re worth. This is arguably easier during an economic downturn, since nearly everything is substantially cheaper than it was a year ago, when sentiment was more positive.
For each investment I make, I want to have a clear thesis for why it is worth buying at this moment. Maybe it is being unreasonably sold off for factors not related to the company, or the strategy for growth isn’t understood by the market.
Finding these diamonds in the rough, then regularly buying and holding them over the long term, is a recipe for a really high-performing portfolio.
2) Diversification
A key part of having a portfolio that can take advantage of the full range of opportunities in the market is spreading out my investments. This means having exposure to different markets, countries, and sectors.
Obviously, each of these will perform differently based on how the economy is doing. So by owning a quality company in each, it’s possible to realise major benefits in some areas, while other weaker stocks struggle.
The best example of this in 2022 was owning energy stocks while also having some technology companies in a portfolio.
Where these companies were in a downward trend, plenty of oil and gas companies doubled in share price, offsetting any losses, and ensuring the portfolio kept on growing.
3) Risk and volatility management
In addition to diversifying across markets and sectors, I always look to balance my portfolio by potential risk, ensuring I never have too many high-volatility companies.
If the balance of a portfolio is moving too much, it can be harder to stick to my strategy, and stay motivated. I’ve built a portfolio with a good range of index funds, such as the S&P 500 or FTSE 250, which encompasses hundreds of the best companies in the USA and UK.
Owning these funds balances out any peaks and troughs in the individual companies, making my portfolio a little less prone to major jumps in either direction.
