April is associated for a lot of people with ISA season. A whole new tax year means a new allowance for ISAs. Like a lot of people, I plan to invest in a Stocks and Shares ISA this year. Here are some common mistakes I will be seeking to avoid.
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.
1. Wasting an ISA allowance
Each tax year, there is an annual deadline for contributions to an ISA. Once it has passed, that tax year’s allowance has gone forever.
It can be tempting to put off starting an ISA until ready to buy specific shares. But, depending on the timeframe, that can mean losing one year’s ISA allowance forever.
I think it makes better sense to consider putting spare money into an ISA to take advantage of the current year’s allowance, even if there’s no specific plan for how to invest it yet.
2. Taking dividends out as cash
When shares in the ISA earn dividends, it can be tempting to take them as out as passive income.
Whether that is a ‘mistake’ depends on one’s priorities. Maybe the cash is useful at a given moment.
But once the cash is taken out of the Stocks and Shares ISA, it loses the tax benefits of being inside the ISA wrapper. Keeping it inside means that, even with a £20k allowance, one could actually have more than £20k of fresh money inside the ISA in a given year to invest.
3. Ignoring small-seeming costs
0.5%, 0.75%, 0.9%. Those can seem like small numbers, almost not worth bothering about.
But imagine someone told you that you could go to sea in a boat that had a 0.5% chance of sinking or one with a 0.9% chance of sinking.
Suddenly, you might see things very differently. Neither figure is actually that small. Plus, one is almost twice as big as the other.
One way to think about an ISA platform is as a leaky boat. Every year, you lose a certain amount of its value in the form of costs, fees, commissions, taxes, and the like.
That is not necessarily as bad as it sounds – in return for those costs you may be getting excellent service. But over time, small-seeming charges can add up and eat significantly into investment returns.
So it is smart for an investor to choose the Stocks and Shares ISA that they feel best suits their specific needs and situation.
4. Investing in the wrong shares
Another common mistake almost every investor has made is buying the wrong shares.
Easy to say in practice – but how to try and reduce this risk in practice?
To illustrate, consider my investment in Diageo (LSE: DGE). So far, it has been very disappointing, but I have held my nerve in line with my long-term approach to investing.
I like the business because it has a large target market and specific competitive advantages that help it compete, such as a premium brand portfolio and global distribution network.
Before investing I seriously considered the risks, from lower alcohol consumption levels among younger generations to a recession hurting consumer spending power.
But I reckoned the price I paid offered me a long-term margin of safety relative to what I think the business is worth. Time will tell whether I was right!
