3 ISA mistakes to avoid

By avoiding these three common mistakes, our writer hopes to reduce the risk of unwelcome surprises in his Stocks and Shares ISA.

| More on:

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.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing in a Stocks and Shares ISA can be very rewarding.

But things do not always turn out that way. Indeed, sometimes the value of an ISA may go down rather than up.

Here are three mistakes I’m keen to avoid in my ISA.

Should you invest £1,000 in Amazon right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Amazon made the list?

See the 6 stocks

1. Too much of a good thing

Over the past five years, Nvidia stock has soared 2,769%.

Created with Highcharts 11.4.3Nvidia PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

That means that, if I had invested all of a £20k ISA in the chipmaker in November 2019, I would now have an ISA worth over £570,000.

Wow!

But while it is easy to look at a share with the benefit of hindsight, that is not a luxury open to any investor when making choices. It was not inevitable five years ago that Nvidia would perform as strongly as it has.

If I had put all of a £20k ISA into Nvidia stock five years ago and things had not turned out as well, I would have taken an unnecessary risk by not diversifying properly. Nvidia has soared but many other companies that looked promising five years ago have sunk in value.

2. Focusing too much on past performance

When making choices about how to invest an ISA, it is common to look at the past performance of shares. That might be when considering earnings as part of a price-to-earnings ratio for valuation purposes or it could be for dividend purposes.

I think that makes sense, as past performance can give an indication of how a business has performed. My preference is to invest in firms with proven business models.

However, past performance, although informative, is not a guide to what may happen in future. Forgetting this crucial point can be a costly mistake, for example when it leads to investing in a high-yield share only to see the dividend slashed, or cancelled altogether.

To put this into context, consider Vodafone (LSE: VOD). Back in its 2019-2020 financial year, the company was turning over close to €45bn annually and paying a dividend of 9c per share. Like now, it benefitted from a strong brand, huge customer base, and competitive position in a market that looks set to stay large.

Fast forward to today. Revenues have fallen around 18% and the dividend has been halved. The company has been selling off assets, meaning revenues are likely to remain lower than they once were.

Created with Highcharts 11.4.3Vodafone Group Public PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

In the past five years, the Vodafone share price has fallen 56% and the dividend per share has fallen by almost as much. Five years ago, a previous dividend cut, inconsistent business performance, and large debt pile could have alerted a forward-looking investor to some of the risks, in my opinion.

3. Ignoring dividend cover

A related mistake is to look at dividends without considering the source of dividends.

When choosing income shares for my ISA, I look at what I expect to happen to free cash flows in coming years and what that means for dividend cover.

Just because a business goes through a weak patch does not necessarily mean the dividend is in danger. Whether it is depends on how well covered it is. If existing free cash flows barely cover (or fail to cover) the cost of the dividend as it stands, it is a red flag for me as an investor.

AI Revolution Awaits: Uncover Top Stock Picks for Massive Potential Gains!

Buckle up because we're about to dive headfirst into the electrifying world of AI.

Imagine this: you make a single savvy investment in some cutting-edge technology, then kick back and watch as it revolutionises entire industries and potentially even lines your pockets.

If the mere thought of riding this AI wave excites you and the prospect of massive potential returns gets your pulse racing, then you’ve got to check out this Motley Fool Share Advisor report – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And here’s the kicker – we’re giving you an exclusive peek at ONE of these top AI stock picks, absolutely free! How’s that for a bit of brilliance?

Get your free AI stock pick

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Nvidia and Vodafone Group Public. 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.

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »