Investing within a Stocks and Shares or Lifetime ISA is one of the best ways to build wealth in the UK. Within these accounts, all gains and income generated are tax-free.
Here, I’m going to explain how I’d invest £20k in an ISA today. These are the moves I’d make in an effort to create long-term wealth.
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.
Spreading my risk
If I was putting money to work within an ISA today, one thing I’d certainly do is take a diversified approach to investing.
Diversification is the process of spreading money over many different investments (not putting all of your eggs in one basket). And it can significantly increase the chances of being a successful investor.
While shares tend to generate strong returns over the long term, not every stock is going to do well. For every JD Sports Fashion (up around 70% over the last five years) there’s a BT Group (down around 40% over the same period).
Ultimately, diversification reduces the risk of investing a lot of money in a dud. To diversify, I could buy a range of different stocks with my £20k. Alternatively, I could invest some of my money in funds or investment trusts for instant diversification.
A global approach
I’d also take a global approach to investing. The UK has some world-class companies. Diageo, Unilever, and London Stock Exchange Group are some good examples.
But let’s face it – a lot of the world’s most dominant companies (Apple, Amazon, Alphabet, etc) are listed overseas. And many of these internationally-listed companies are generating strong returns for investors.
Apple, for example, is up about 300% over the last five years.
So I’d spread my £20k across both UK and international shares.
It’s worth noting that buying US shares in an ISA is very easy today. One issue to be aware of however, is foreign exchange rates. If I was to buy a US-listed stock today, and the pound immediately strengthened against the US dollar, my holding would be worth less in GBP terms.
Small-cap stocks for big gains
Finally, I’d invest in both large-cap stocks and small-cap shares.
Investing in large caps has plenty of benefits. Larger companies often pay dividends and their share prices tend to be more stable than small-caps.
But for big gains, it’s hard to beat small-caps. Often, smaller companies are growing at a spectacular rate. Meanwhile, they tend to be less researched, meaning there’s more potential for better-than-expected results and explosive share price movements.
An example of a UK small-cap that has done really well in recent years is Cerillion. Five years ago, it was trading at around 150p. Today however, it’s near 1,300p, meaning a £2k investment has grown into more than £17,000.
Taking a long-term approach
Of course, making these three moves wouldn’t guarantee success. But I reckon that over the long term, this approach to investing £20k should work pretty well.
