Every year, British investors can inject up to £20,000 into a Stocks and Shares ISA without having to worry about paying taxes on any capital gains or dividends received. This is particularly advantageous today, given the stock market is still reeling from last year’s correction.
Both UK and US shares have fallen significantly on the back of rapidly rising interest rates, elevated inflation, and geopolitical conflicts. Yet, while the ongoing economic conditions are less than ideal, the stock market has always persevered and recovered from every similar period in the past.
That includes a global meltdown of the entire financial system in 2008. And snapping up bargain stocks today could send an ISA surging. Here’s how.
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.
Profiting on investor fear
The best periods to achieve the biggest returns from equities in the past have almost always been just after a crash or correction. Why? Because overly fearful investors end up selling off top-notch stocks out of fear of potential loss.
This downward pressure drags valuations in the wrong direction, creating buying opportunities for smarter individuals. In fact, this is precisely what billionaire investor Warren Buffett was referring to when he said: “Be fearful when others are greedy. Be greedy when others are fearful”.
Of course, simply buying shares in businesses that have been aggressively sold off isn’t likely to result in success. Rather, it would likely send an ISA firmly in the wrong direction.
Panicking investors may not always make the smartest decisions. But their fear is triggered by something. And it’s critical to discover what that is before being able to make an informed decision about a business.
A firm that misses its earnings target due to a temporary disruption in production isn’t all too concerning. And, providing that management has a plan to get things back on track, a buying opportunity may have just emerged for my ISA.
However, what if a debt pile is becoming unmanageable due to rising interest rates? Or perhaps a competitor has just released a new product or service that makes the company’s existing solution obsolete? In these cases, a sharp downturn in valuation may be warranted.
Walk, don’t run
Despite severe downturns in the stock market being vivid in memory, these events are actually quite rare. In the last 20 years, we’ve only had three. And that includes the Covid crash, which recovered in a few short months. Therefore, the window of opportunity to capitalise on bargains today could be closing, especially since economic conditions seem to be improving both in the UK and across the pond.
However, it’s important not to rush into making an investment decision for fear of missing out. New buying opportunities are constantly emerging, even during bull markets. So just like panic selling is a mistake, panic buying can be equally problematic.
Every investment carries risk, and these need to be weighed against the potential returns to make an informed decision. Buying cheap but mediocre businesses isn’t likely to deliver a stellar performance in the long run.
But high-quality enterprises with plenty of growth potential might, especially if they can be purchased at a discounted price.