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Here’s how I’d invest £500 per month in an ISA starting right now

Congratulations, if you’ve decided to invest £500 per month in the stock market. Or, indeed, any other sum. Now looks a great time to be starting. Markets are at depressed levels, due to the economic impact of Covid-19. And history tells us buying stocks during challenging times like this can lead to stellar long-term returns.

You’ll pay no tax on those returns, if you invest using a Stocks and Shares ISA. You can put up to £20,000 in such an ISA this financial year. So how would I invest £500 per month, say, starting right now?

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Getting started

Opening a Stocks and Shares ISA is quick and easy. Also, share-dealing costs are much lower these days than they once were. This makes buying £500 of shares in a company reasonably cost effective.

I personally favour choosing individual businesses to invest in, as opposed to handing my money over to a fund manager. For one thing, I’m interested in businesses, accounting, and valuations. For another, I reckon no one cares about my money as much as me!

So, in getting started, I’d open a Stocks and Shares ISA, and look to buy shares in individual companies.

How I’d invest £500 per month

The world’s greatest investor, Warren Buffett, said in his 1993 letter to shareholders: “If you can identify six wonderful businesses, that is all of the diversification you need … Very few people have gotten rich on their seventh-best idea.”

Now, I wouldn’t be comfortable aiming for a portfolio with as few as six stocks. On the other hand, I think my levels of analysis, confidence and conviction would suffer, if I went much above 20. As such, over the course of the first year, making 12 investments of £500 in different companies would suit me well.

In the second year, I might add one or two new holdings. But only if they were businesses I really wanted to own, trading at compelling valuations. Otherwise, I’d continue to invest £500 per month in my first 12 picks, looking for the best value each month.

Wonderful businesses

I believe some diversification by industry and geography is sensible, but I reckon diversification for the sake of it is counterproductive for investment returns. I’d sooner buy a second wonderful business in one sector, than a poorer quality company in a different sector just for the sake of diversification.

What do I mean by a wonderful business? I’d look for companies operating in industries with good structural growth drivers. Within those industries, I’d look for companies with competitive advantages, such as powerful brands, valuable patents, high customer switching costs, network effects, and so on. I’d also look for strong management and balance sheets.

A great time to invest £500 a month

As I mentioned at the top of the article, if you’re looking to invest £500 per month in the stock market, now could be a great time to start. There are wonderful businesses trading at prices that haven’t been available for years.

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G A Chester 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.