Here’s how I’d invest £20k in a freshly-minted Stocks and Shares ISA

I firmly believe the Stocks and Shares ISA is a fantastic way to grow wealth. By making regular contributions towards the annual £20k allowance, investors can maximise their tax-free returns. My approach is to invest consistently, but if I had a £20,000 windfall today, this is how I’d allocate it.

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.

Building a diversified portfolio

The first step is deciding how many stocks to include in my ISA. While there’s no definitive answer, several successful investors have portfolios highly concentrated on individual stocks. Billionaire investor Warren Buffet has historically allocated around 40% of his portfolio towards single stocks like Amex and Apple.

However, for most of us starting out, a more gradual approach is sensible. I believe a balanced portfolio of 20-25 stocks diversified across both income and growth stocks makes a solid foundation.

Risk reduction

To reduce risk, I wouldn’t invest the entire £20,000 at once. Spreading investments over the year by making monthly contributions is a more strategic approach. This reduces the possibility of putting everything in just before a market slump.

Drip-feed investing’s a strategy used by some investors for this reason. It simply means outlaying a small set amount each month (or week), regardless of how the market’s doing. In the past, I’ve tried waiting for market dips that never materialised. Eventually, I ended up buying in at a higher price.

So trying to accurately time the market’s best reserved for investors with lots of experience.

A solid starting point

One potential investment to consider is Barclays (LSE: BARC). This FTSE 100 banking giant’s currently my best performing stock, up 57% over the past 12 months. And after such a long period of growth, it would be expected that the stock’s overbought. Yet it’s still trading at 62% below fair value, based on future cash flow estimates. 

As a smaller UK bank, it’s often overshadowed by Lloyds and HSBC but I think it offers better prospects. For example, its price-to-earnings growth (PEG) ratio is 0.7. Any number below one indicates earnings are growing faster than the price, so the stock represents good value. Lloyds PEG’s 1.5 times earnings, meaning the price is a bit high compared to its earnings growth.

For now, the economy’s doing well, helping Barclays grow. But if it slips into another 2008-style recession, banks could be among the hardest hit. That’s my biggest concern regarding the stock.

Buybacks vs dividends

On 1 August, the bank announced plans for a further £750m share buyback programme. This follows the completion of a previous £1bn share buyback initiative announced in its full-year 2023 results. The latest plan’s part of a drive to return £10bn in capital to shareholders between 2024 and 2026. It aims to achieve this goal via a mix of buybacks and dividends.

Sadly, Barclay’s doesn’t hold a candle to HSBC when it comes to dividends. With only a 3.6% yield, it’s half that of the UK’s largest bank. This is likely due to its strategy of dedicating more profits to buybacks than dividends. 

It’s a trade-off that could work at the risk of deterring dividend-focused investors.

As mentioned above, diversification’s key. That’s why I also own some HSBC shares along with other top dividend payers like Legal & General.