If I opened a £20,000 Stocks and Shares ISA today, here’s what I’d do

The first step to investing in a Stocks and Shares ISA can be scary, so here’s what I think is the safest way to get started with the lowest risk.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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It looks harder than ever to start investing. Even at the best of times, putting money in the stock market can seem scary, but the current high interest rates and inflation environment adds another layer of fear to opening an account like a Stocks and Shares ISA.

That said, these ISA accounts are getting more and more popular as people discover the wealth-building power of this type of investing.

The rate of return from stocks can open up an additional income stream that can be built up year after year. With the right choices, an ISA can even be a path to a second income or early retirement. 

I opened my own Stocks and Shares ISA some time ago and it will go down as one of my better decisions. I’ve been happy to see the money I save grow in this account even if I made a mistake or three along the way.

One simple step

If I were to open a £20,000 Stocks and Shares ISA today, I’d get started with one simple step. It’s a type of investment that’s hard to get wrong, even for those new to investing. I wouldn’t need loads of money to begin with either as even a £100 stake could be a useful starting point. 

That first step would be to invest in an index fund. These funds contain lots of companies and often function like a tracker for an entire stock market.

Popular index funds track the FTSE 100, the American S&P 500 or even global stocks like the MCSI World Index. They’re simple to buy and I can get started even with just a small stake. 

Low risk

Most importantly, these index funds are as low-risk as I could get with stocks.

Because they contain so many companies, any risk is spread out and my investment is diversified. I’m not throwing all my money into a single firm, I’m hedging my bets with hundreds of them in diverse fields like engineering, pharmaceuticals, retail and almost anything else I can think of. 

The bigger funds are well spread out geographically too. With the FTSE 100, around 80% of all the earnings come from overseas, so I’m not limited to the fortunes of the UK or any other single economy.

While all this diversification does limit risk, it doesn’t remove it entirely. Stock market crashes and corrections are inevitable and the money I’ve invested will go down from time to time. This doesn’t concern me though as I’m not focusing on the short term. Over long periods, stocks have an excellent record of growing wealth. 

Branching out

I will say that this is an excellent first step, but I can branch out once I’ve done this.

My own investing journey went like this. After I got used to investing in funds, I chose individual firms to help me increase my rate of return. It’s worked well for me so far and I’m very glad I made that initial investment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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