3 ways to try and build a bulletproof ISA

Jon Smith explains factors such as allocating funds to defensive stocks as a way to try and smooth out volatility within an 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.

A Stocks and Shares ISA can be a great tool for people to consider using for their investments. UK investors pay no dividend or capital gains tax from the stocks they buy and sell within the ISA. For someone just starting out and opening an ISA, here are three ways to try and build a robust portfolio that can withstand volatility over time.

Allocation to defensive shares

Defensive stocks often come from sectors such as consumer staples and utilities. Companies that provide goods and services are seen as necessities. As a result, revenue and profitability shouldn’t be materially impacted during a recession. Therefore, these stocks often perform better than consumer discretionary and other similar sectors during a volatile period.

By considering allocating a portion of ISA funds to defensive shares, an investor can look to smooth out volatile performance in the portfolio. Of course, such stocks are unlikely to provide huge share price gains. But they can help to protect an ISA over time.

Should you invest £1,000 in Shell 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 Shell made the list?

See the 6 stocks

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.

Diversify in different ways

Holding a number of different shares in a portfolio is a great way to reduce risk. After all, with a dozen stocks when one has a problem, the impact is less than if I only held that share.

However, some investors forget about diversifying in other ways. For example, having exposure to companies around the world, instead of just UK ones, including stocks trading in the US, or with a big base in Asia. If the UK struggles, the portfolio shouldn’t necessarily underperform.

Make smart use of income stocks

Some investors think that when they get paid a dividend, the best thing to do is take the money and spend it. It’s true that this is an option, but when trying to build a strong ISA I believe there’s a better option.

Any income that’s received can be used to buy more of the same stock. This means that even during a period of high volatility when stock prices are falling, the dividend money can be used to buy at a lower price, without having to add more cash to the ISA! Over time, this can provide a better blended average purchase price, and acting to smooth our share price swings.

An idea to think about

An example of a stock worth considering for is PayPoint (LSE:PAY). The FTSE 250 stock has a current dividend yield of 4.75%, with the share price up a whopping 90% over the past year. Even with this, the price-to-earnings ratio is 12.75. Although it’s above my fair value benchmark of 10, I wouldn’t say it’s anywhere close to being overvalued.

Created with Highcharts 11.4.3PayPoint Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

It pays out quarterly dividends, which gives frequent opportunities to receive cash. Not only that, but I’d also classify it as a defensive stock. The business provides payment services, with a strong footing in the UK for retail transactions. Regardless of the state of the economy, payments will still be flowing during good times and bad.

One risk is that net debt is increasing, with the half year report showing it ticking higher to £86.8m. This was due to making more investments to fuel growth, which is understandable but it does need to be careful.

On balance, I think it’s a stock that investors could consider for inclusion to help build a robust ISA.

Should you buy Shell now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

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.

Jon Smith 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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing For Beginners

Smart young brown businesswoman working from home on a laptop
Investing Articles

Could BP’s share price rebound over the next 12 months? These analysts think the answer is ‘yes’!

BPs share price has plummeted over the last year. But City brokers think things are about to turn around, as…

Read more »

Affectionate Asian senior mother and daughter using smartphone together at home, smiling joyfully
Investing Articles

With Cash ISA changes coming, could now be the time to consider buying shares?

Changes to the Cash ISA could lead to greater investment in the stock market. This could be a good thing…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

3 FTSE 100 safe haven stocks to consider as trade wars bite

I'm confident in the long-term outlook for the FTSE index of stocks. But these blue chips may protect investors from…

Read more »

Investing Articles

2 cheap FTSE 100 and FTSE 250 shares to consider for an ISA before 5 April!

These FTSE 100 and FTSE 250 shares are on sale today! Here's why long-term Stocks and Shares ISA investors should…

Read more »

Investing Articles

How I’m building a new second income for 2035

Millions of us invest for a second income. Here are the steps Dr James Fox is taking in order to…

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 »

Investing Articles

3 top FTSE 100 shares to consider for a new ISA

The FTSE 100 is packed with top-notch companies that can form the building blocks of a quality Stocks and Shares…

Read more »

Investing Articles

Is buying gold stocks the best way to capitalise on bullion’s bull run?

Forget about gold bars, coins, and funds for a moment. Here's why considering gold stocks could be the best option…

Read more »