£4,000 in savings? I’d start investing with a Stocks and Shares ISA

If this Fool had cash in the bank, he’d start putting it to work with a Stocks and Shares ISA. Here he explains how he’d do it.

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It may seem safer to have all your money stashed away in the bank. But as I’ve started to invest in the stock market, I’ve quickly realised that buying stocks is a much better option for me if I want to build my wealth over the years and decades. And investing through a Stocks and Shares ISA is one of the most efficient ways for investors to start putting their money to work.

The FTSE 100 has been rising in 2024. It’s now above 8,200 points. But while many stocks have made a strong recovery from their pandemic lows, I think there are still plenty of buying opportunities out there for investors to consider.

If I had £4,000 saved, here’s how I’d get started with an ISA today.

Getting started

Higher interest rates mean plenty of savings accounts are offering fairly lucrative rates at the moment. But as the Bank of England begins to bring down the base rate, these rates will also be reduced.

The Stocks and Shares ISA is the best option, in my opinion, to invest with. Each year, every investor is granted a £20,000 use-it-or-lose it limit to invest. Of all the benefits an ISA provides, the most important is that on the capital gains made and dividend payments received, not a single penny’s paid in tax.

With that, it means I can take full advantage of the growth opportunities the stock market offers.

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.

Diversification

With £4,000, I wouldn’t invest it all into one stock or industry. Instead, I’d diversify my portfolio.

I’d look to buy five to 10 different companies across a number of sectors. By doing that, I’d offset my risk. That’s because my portfolio wouldn’t be reliant just on one company or a specific industry. If that company or industry experienced a major downturn, there’s a good chance I’d see my £4,000 dwindle away. That’s the last thing I want.

Meaty dividend yields

I’d also target companies with above-average dividend yields. The FTSE 100 average is 3.6%, so I’d aim for anything higher than that. By targeting stocks that reward investors with dividends, I’d start making passive income.

An example

An example of a stock I like right now is Burberry (LSE: BRBY). Its performance has been dire recently. It has lost 56.3% of its value over the last year. But I love a bargain, and with Burberry I see just that.

Its shares look dirt cheap, trading on 12.1 times earnings. Burberry also yields a meaty 6.9%, comfortably above my benchmark.

The reason for its major share price fall has been declining sales. A cost-of-living crisis had led to many consumers battening down the hatches and cutting back on luxury goods like the ones Burberry offers. I reckon we could see the iconic fashion company continue to struggle in the months ahead.

But looking past that, I’m optimistic we’ll see spending pick up when interest rates are cut over the next couple of years. I’m not expecting a quick turnaround with the stock. But at its current price, I think its shares look attractive.

If I had the cash, I’d happily buy Burberry shares today. While I’d make sure to diversify my holdings, it would be companies like Burberry that I’d target.

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.

Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry Group Plc. 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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