I have a very tricky hurdle to clear in the coming days. My wife has asked me what she should do with three new Stocks and Shares ISAs — one each for herself, our son (22), and our daughter (19). Eek.
Having recently received a tax-free windfall from her long-term corporate savings, my wife can afford to invest the maximum £20,000 yearly allowance into all three Individual Savings Accounts (ISAs) in one go. But how should she invest this £60k?
Why use Stocks and Shares ISAs?
As a big fan of ISAs, my wife invests the full £20k into stocks and shares pretty much every tax year, but why? The simple answer is that her money can avoid various taxes inside this tax-free wrapper around her investments.
Also, as a long-term investor looking to generate extra income and capital gains, it makes sense for her to invest in shares for the long run. But which markets should she (and our children) buy now?
I am unable to predict the future
One thing 37 years as an investor has taught me is that, in financial markets, the future rarely resembles the past. This year’s star shares can become next year’s dog stocks — and vice versa.
Hence, when I hand out investment guidance (not regulated advice!) to family and friends, the point I stress most is that I cannot predict the future. All I aim to do is hand out sensible, calculated insight, based on my experiences as a veteran value investor.
That said, I have given my wife three different (but partly similar) options for these new ISAs. Here they are:
1. Bet on the US
In 12 of the last 13 calendar years, returns from the US stock market have beaten those generated by the rest of the world. Thus, betting on American shares has been by far the best option since 2010.
My son — a mathematician and programmer — is very interested in US tech and culture, so this might be his preferred option. However, I have warned him that American stocks are very expensive currently. The S&P 500 trades on a premium rating of 20.3 times earnings, while offering a lowly dividend yield of 1.5% a year.
2. Back the UK
My second option — what I expect to be my wife’s preferred choice — would be to buy unloved and undervalued UK blue-chip shares.
Today, the elite FTSE 100 index trades on a rating of under 10.5 times earnings, generating a tasty earnings yield of 9.6%. What’s more, the index offers a forward dividend yield of 4.1% a year, covered more than 2.3 times by earnings.
My wife likes to buy and hold (or ‘fire and forget’) with her investments, so I suspect that she will take the low-risk option of investing in a FTSE 100 tracker fund with tiny fees.
3. Go global
My daughter is off to medical school shortly, aiming to qualify as a doctor in five or six years. She finds investing incredibly boring and will have no time to think about it. For her, I have suggested the broadest of diversified stock portfolios: a low-cost global tracker fund investing in thousands of top companies.
So, there you have it: three different choices for three different investors. Now let’s see who picks what!
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.
