Investing via a Stocks and Shares ISA can be a lucrative activity. Disappointingly, it does not always turn out that way!
Successful investing involves getting things right – but it also means trying to avoid some common investing mistakes.
Here are three potentially costly missteps I aim to avoid with my Stocks and Shares ISA.
A common error when trying to maximise income is chasing yield.
There is nothing wrong with having a strong dividend stream as an investing objective. Indeed, that is partly why I own shares like M&G and Legal & General.
But it is important not to let the tail wag the dog.
Is the high yield the only attraction of a share? Or is that yield a reflection of a solid business that is generating substantial profits or free cash flows?
Billionaire investor Warren Buffett says that he does not think in terms of buying shares. Rather, he considers the activity through the lens of owning a small stake in a business. I reckon a similar approach to investing via my ISA could help me avoid some yield traps.
Doing too much
Another thing Buffett tends to do is: not very much!
In fact, his masterly inactivity popped up in this year’s letter by the Sage of Omaha to shareholders in his company Berkshire Hathaway. He mused that the business’s results over the past few decades have largely been driven by about one “truly good decision” every five years.
In fairness, that does not mean he sits on his hands all day. He spends hours every day scouring company reports and trying to find great investments.
But Buffett’s approach involves making few investment moves. He waits to go for those he likes in a big way, rather than drip-feeding money into a wide range of mediocre opportunities.
Doing the same with my ISA makes sense to me.
Growing its value is a much more realistic proposition if I can find a handful of great investment opportunities than dozens of companies I simply think might be worth a punt. After all, I see an ISA as a vehicle for investment not speculation.
Keeping a lid on costs
When it comes to choosing companies in which to invest, people often look at how good the firm’s cost control is.
Buffett certainly does. Disciplined cost management can make the difference between an attractive top line and a less appealing bottom line.
But not everyone applies the same discipline to their own ISA!
Charges and fees can add up, meaning that even if I find great shares that go up in price or pay juicy dividends, I may still not get the rewards I would hope for.
That is why I am careful to choose a Stocks and Shares ISA that matches my own personal financial situation and investment objectives.