A Stocks and Shares ISA has some big tax benefits for investors. But there’s only one week left to add money and any contribution room that hasn’t been used can’t be carried forward.
That’s not a long time, but investors still need to be careful. There are still some important mistakes that it’s important to try and avoid even though time is running out.
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.
Mistake one: being in a rush
When it comes to investing, the most important thing is doing enough research to get a proper understanding of the underlying business. That’s as true in April as it is at any other time.
According to Warren Buffett, risk comes from not knowing what you’re doing. And investors need to be careful to avoid letting the impending deadline rush them into a bad decision.
Figuring this out involves thinking carefully about companies in a couple of different ways. The first is qualitatively (ie, non-numerically) and the other is quantitatively (ie, numerically).
Take Tesco (LSE:TSCO) as an example. Its key strengths as a business include the fact it’s the leader in the UK grocery market, which gives it good negotiating power with suppliers.
On the other side of the equation is the fact that it’s not hard for customers to start shopping elsewhere if they want to. And this shows up in some of the firm’s financial metrics.
Tesco’s margins are generally very narrow – usually below 3% – and returns on invested capital are also low. And that means there’s a constant risk of inflation cutting into profits.
Mistake two: ignoring valuation
A big part of investing is being selective about when to invest. That doesn’t mean figuring out where share prices are going, but it does mean trying to figure out what a stock is worth.
With only a week to go before the ISA deadline, it might be tempting to overlook the fact a stock isn’t really trading below its intrinsic value. But this is a big mistake.
Investing isn’t about buying stocks in order to sell them to someone else. It’s about finding opportunities where the underlying business generates enough cash to provide a return.
With Tesco, the entire company has a market value of just over £22bn. And there’s another £15bn or so in debt that will have to be either managed or paid off eventually.
At the moment, the business generates around £2.5bn per year in cash. That amounts to a return of around 6.75%, just over half of which comes back to investors as dividends.
Does that make the stock cheap? It might do – if interest rates don’t go up, I think investors should be pleased with a 6.75% return, as long as Tesco can maintain its current profitability.
Stick to the basics
Even at times like this, investors need to be sure to focus on the basics. That means sticking to companies they can understand in enough detail and being attentive to valuations.
With only a week left to use this year’s ISA contribution limit resets, I think Tesco shares are worth a look. But the deadline is only for adding money, not getting it into the stock market.
A tight deadline therefore isn’t a reason to start buying stocks without due care and attention. Mistakes made in a hurry can still have long-term implications.
