The new financial year is here, meaning a fresh £20,000 Stocks and Shares ISA contribution limit. Every year I make it my priority to use as much of this as I can – it just makes sense from a tax perspective.
But how should I go about doing this over the course of the year? Should I look to buy now, or should I hold my cash and wait for better opportunities to emerge?
Two strategies
One way of investing in the stock market involves trying to figure out when shares are at their cheapest and then buying them. This involves working out when the market isn’t going to go any lower.
The trouble with this approach is that it’s difficult. Knowing when prices are at their lowest levels is only easy looking back. In real time, it’s difficult, and some say impossible.
An alternative approach is to just buy as often as possible. That way an investor gets the average price of the market over time and if it goes up – which it generally does – the investor makes money.
This avoids the problem of trying to work out when shares are at their cheapest. But it involves buying stocks when they’re clearly in bubble territory and good returns from investments are unlikely.
With my Stocks and Shares ISA, I’m not following either approach. By using a different strategy, I’m hoping to avoid the problems with each.
Intrinsic value
Instead of trying to work out when stocks are as low as they’re going to be, my plan is to invest when I believe prices are below what the shares are worth. If I can do this, it avoids the problems of both approaches.
By focusing on what an investment is worth – its intrinsic value – I don’t need to know whether the price is going to be higher or lower tomorrow. I only need to know whether it’s below what I think it’s worth right now.
I also shouldn’t find myself buying when prices are too high. Sticking to investments where the stock trades at less than what I think it’s worth should stop me buying when prices are obviously too high.
This is the strategy billionaire investor Warren Buffett has used to such good effect over the years. So if it’s so successful, what’s the disadvantage – in other words, why doesn’t everyone do it?
The obvious reason is that working out what an investment is worth isn’t straightforward. Buffett’s success is as much a result of his own uncommon skill as his approach to investing in stocks.
I’m not suggesting I’ll achieve a Buffett-like return in my Stocks and Shares ISA. But there are things I can do to give myself a better chance with this approach.
Investing £20,000
The best thing is to stick to companies that are relatively easy to predict. By definition, this makes it easier for me to avoid overpaying for a stock when its price is more than its worth.
Whether prices go up or down, if I stick to buying shares below their intrinsic value, I can be happy I got a good deal. Rather than guessing about the future, when I see an opportunity, I plan to take it.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
