Tax-free investing in a Stocks and Shares ISA strikes me as a bit of a no-brainer in itself.
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However, are there any no-brainer investments I can put in my ISA?
Some come pretty close. For example, super-star investor Warren Buffett makes a low-cost S&P 500 tracker fund sound like a no-brainer long-term investment.
Compounded annual gains
In his 2022 letter to the shareholders of Berkshire Hathaway, Buffett said the S&P 500 index had delivered a compounded annual gain of 9.9% since 1965.
An annual return averaging about 9.9% a year is pretty handy. But it’s all the more attractive because a tracker fund investment would be passive. I’m all in favour of minimising my workload while investing effectively.
There’s never any guarantee that past performance is a guide to future returns. Nevertheless, I’d rather invest in a vehicle that has a decent record than one that has previously performed poorly.
The UK’s own FTSE 250 index has many growing businesses in its ranks. And at the recent level of 19,520, its up by more than 470% over the past 30 years. That’s not a bad capital return. But reinvesting dividends along the way would have improved that outcome.
So I’d diversify my ISA by investing in a FTSE 250 tracker fund too. And I’d pick the accumulation version that automatically reinvests dividends as they arrive. Right now, the dividend yield of the FTSE 250 is about 4%, and that level suggests the index offers some decent value at the moment.
One of the great advantages of mechanically managed tracker funds is the wide diversification we get across many underlying shares. So the risk of financial ruin from any one plunging underlying stock price is removed. Instead, with trackers we are aiming to match the performance of parts of the stock market.
Investment trusts and stocks
However, for my Stocks and Shares ISA I wouldn’t stop at investing in tracker funds. Sometimes investment trusts can be worth holding for the long term if they are run by able investment managers.
We can buy and sell investment trusts just like any other stocks. But the advantage, as I see it, is the trust manager invests across several businesses giving us instant diversification again. Typically, trusts hold fewer positions than tracker funds and follow a particular investment theme or style.
I’m holding a few investment trusts, such as Finsbury Growth and Income Trust, Smithson Investment Trust, and Scottish Mortgage Investment Trust.
However, on top of those, I’d also populate an ISA with some carefully chosen individual company shares. I like energy company National Grid for dividends. And I’m holding retailer Marks and Spencer for its ongoing turnaround and growth potential.
In summary, I don’t think any potential investment is a true no-brainer. All businesses can face challenges from time to time. But modest diversification between several positions can help to spread the risks in a Stocks and Shares ISA. And the only way to expose ourselves to potential gains is to embrace potential risks as well.
