My own Stocks and Shares ISA is getting on a bit these days. In fact, I’d say it’s quite battle-hardened, having experienced pops, drops, bull and bear markets, as well as the odd crash or two.
I’ve inevitably made some investing mistakes in my ISA along the way. For example, I sold a long-held position in Tesla shares in 2018, not long before the automaker started reporting profits and the stock proceeded to rocket nearly 15 times in value!
Fortunately, I’ve also made some good investments to make up for the inevitable duds. Here’s three stock I’d buy today if I had £20,000 sitting in my freshly minted ISA.
Diversification
Diversification may sound cliché, but it’s absolutely critical. Warren Buffett has called it “protection against ignorance“. And when I’m just starting out, I’m obviously still learning. So diversification would help mitigate against my own ignorance.
For example, say I really like growth stocks. So I decide to build my portfolio around them and skip what I consider to be boring value stocks. That may work for a while, but then I could be nursing some big paper losses if and when this approach stops working. To make matters worse, those boring stocks I avoided might be marching higher while my portfolio is down.
This is not hypothetical. It’s basically what happened last year. Growth stocks, many of which had only seemed to go up for about 10 years, suddenly fell out of favour. Value stocks, particularly in the energy and mining sectors, surged in value.
The sensible strategy then is for me to diversify and hold different stocks within different sectors.
A basket approach
The Vanguard S&P 500 UCITS ETF is a very popular choice for investors wanting to invest in a wide range of stocks. This is a low-cost exchange-traded fund (ETF) that passively tracks the performance of the 500 largest companies listed in the US.
The share price of this ETF is down 7% since August. So now could be an opportune time to buy.
I’d also invest in a FTSE 100 ETF. This would give me a stake in the largest 100 companies listed in London, as well as an expected 3.7% dividend yield.
While these investments would give me instant exposure to hundreds of powerful multinational companies, they’re not sure bets. There’s a risk they could underperform, at least in the short term. But longer term, the UK and US stock markets tend to rise higher. Owning these would help my ISA grow alongside them.
Personally, I’d buy these two ETFs today if my capital wasn’t already allocated elsewhere. But I am planning to add to Scottish Mortgage Investment Trust, which I’d also buy to start off my ISA.
This is an actively managed portfolio of growth stocks, so straightaway it’s a bit riskier. The managers are choosing individual stocks, and that means there’s more room for underperformance if they back the wrong horses.
The flip side is that the trust could deliver market-spanking returns, which is what it has provided for long-term shareholders. The shares are up 342% in 10 years, outperforming all major indexes.
With current top holdings like ASML and SpaceX, I reckon the stock could rise substantially again over the next decade.
