The problem with this Stocks and Shares ISA lark is that we need to know a lot about it to get started, right?
If that’s true, those starting out today and trying to build up a retirement pot for their later years could miss out on a good thing.
And I reckon being able to invest up to the annual ISA allowance of £20,000, and not pay a penny in tax no matter how much we build up, is a very good thing indeed.
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.
Not too hard
When I talk to people about buying shares, I get a common reaction. People think it’s difficult and dangerous, with the 2020 stock market crash so fresh in our memories.
It’s good to be cautious, and to understand the risks. The next step is to learn how to deal with them. And I reckon that needs a two-pronged approach.
The first is diversification, which I rate as the single most important goal for a Stocks and Shares ISA.
The second is to stick to it for the long term. A good few 2020 fallers have already regained their losses, and then some more. Still, when I talk about the long term, I mean at least 10 years. And, hopefully, a lot longer.
So many choices
Anyway, how does a newcomer to investing know which of the hundreds of diversified UK stocks to go for first?
I’ll tell you how I’d start. My first Stocks and Shares ISA buy would be an investment trust. Specifically, I’d choose one that invests in top FTSE 100 stocks.
I’ll use one I bought as an example, City of London Investment Trust. Its current top five holdings are Shell, Unilever, BAE Systems, HSBC Holdings, and RELX. AstraZeneca is in the top 10, along with Diageo.
Diversification in one
Immediately, I have my money spread across a diverse range of stocks, making just one purchase, and without having to research any of the individual companies.
And one beauty of an investment trust is that when I invest, I buy shares in the actual company. So its managers are serving me, not some faceless fat-cat owners in the City.
The Association of Investment Companies has put together a list of all the investment trusts that have lifted their dividends for at least 20 years in a row. It calls them Dividend Heroes, and details the investment strategy of each one.
I think it’s a great resource, especially for those just starting out.
There’s still risk
Now, buying an investment trust doesn’t eliminate risk. They’re individual companies themselves, and things could go wrong. And their underlying strategy could have a bad patch.
Anyone investing in a trust that goes for US growth stocks, for example, could be sitting on a loss now. Oh, I bought one of those too, Scottish Mortgage Investment Trust.
But I think investment trusts can make a great start to a Stocks and Shares ISA. And we can then branch out and pick our own individual stocks later, as we learn more.
