The Stocks and Shares ISA is a wonderful wealth-building vehicle because it shields both capital gains and dividends from tax. Take on too much risk, however, and it can lead to permanent loss of capital.
Here’s a strategy that’s currently all the rage with young people — but one I wouldn’t touch with my £20k ISA allowance.
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.
The backdrop
An increasing number of young adults today feel like the old ‘work hard, save, retire’ path has been hollowed out by stagnant wages, unaffordable housing, high student debt, and never-ending inflation. The system feels broken or even rigged.
Adding to this is artificial intelligence (AI). There’s mounting evidence that entry-level jobs are dwindling, partly due to AI, so that young people cannot even get their foot in the door.
According to a Trades Union Congress poll, more than half of young adults in the UK now fear AI will replace or impact their job.
The consequence
Given this backdrop, it’s hardly surprising that more young people are piling into crypto, meme stocks, penny shares, and other high-risk bets. They’re embracing extreme risk for much higher potential reward. This trend has been dubbed ‘financial nihilism’.
Now, I have some sympathy with this. If high-risk bets are perceived as the only shot at getting ahead financially, they’re arguably a rational response.
That said, I see most of these popular speculative stocks as ridiculously risky, especially with markets at all-time highs. The firms have flimsy fundamentals, poor profitability (if at all), and weak competitive positions.
Remember, there was a reason why they were so lowly valued in the first place!
What’s more, we have seen this play out (badly) before. For example, the last time meme stocks gained such widespread attention was back in 2021, when GameStop and AMC Entertainment were the hot trades.
Since its June 2021 peak, though, the AMC share price has crashed 99%! Speculators beware.
Blue chips
The good news is that investors don’t have to embrace financial nihilism to generate significant returns in the stock market. Granted, more patience is required, which will require taking more of a long-term approach.
But take a look at the returns of some well-established stocks in the past five years. Broadcom is up 838%, while Rolls-Royce and Nvidia have surged 2,134% and 1,275%, respectively.
These are blue-chip shares producing eye-popping returns normally associated with meme stocks!
Sportswear disruptor
One up-and-coming stock that I think deserves closer attention is On Holding (NYSE:ONON). This is the premium running shoe and sportswear company backed by tennis legend Roger Federer.
Powered by its award-winning CloudTec cushioning, On has now sold tens of millions of trainers across more than 80 countries.
In Q2, net sales increased by 32% (38% at constant currency), and management raised full-year guidance to 31% growth (roughly $3.7bn), up from 28% previously.
This is being achieved against a backdrop of weak consumer spending and tariffs, both of which add risk. And, of course, the athleisure industry is notoriously competitive.
Yet, there’s no denying the growth opportunity here. On is expanding into the apparel category, while targeting the Asia Pacific region and sporting industry-leading margins.
With the stock down 30% since January, and trading at a reasonable 29 times forward earnings, I think this sportwear disruptor is worth serious consideration.
