A Stocks and Shares ISA can be a tax-efficient way to build up a shares portfolio. One of the things I find attractive about such an ISA is that it allows me access to the stock market even if I don’t have much spare money to hand. Here are some principles I use in choosing shares for my Stocks and Shares ISA.
Diversification helps me sleep more easily
While some individual shares can produce stunning returns, other shares also collapse to zero. I’ve owned shares before in what I thought were promising businesses, but the share certificates ended up being worthless pieces of paper.
That’s why I follow the old advice of never putting all my eggs in one basket. Sometimes I’m tempted to plunge into a share I think has a particularly attractive story. But when I think more closely about it, I don’t want to tie the success or otherwise of my ISA too closely to any one company. That’s why I sometimes diversify within a sector by owning more than one name. But I also make sure I’m invested in more than one sector.
I try to focus on growth or income
Some companies attract me because they have strong growth prospects. For example, an industry might look set to grow because of demographic or behavioural shifts. For other companies, I’m attracted more by the income prospects. Tobacco is an example: although I expect the industry to decline over the long term, I still think a share such as British American Tobacco could provide decent income for years to come. That’s why I have it in my Stocks and Shares ISA.
Some shares can provide both growth and income. But I find it helpful first to assess a share by what is its primary attraction to me. Am I looking more for growth in the share price, or for hefty dividends? The reason I find this helpful is because it aids me in clarifying my reason for buying the share. For example, I recently bought Lloyds. I’m hoping it will restore its dividend this year.
But because it pays no dividend for now, I wasn’t able to see it as an income pick. That forced me to answer the question of what the growth drivers could be for the share price. Despite it risks and dependence on the UK economy, I felt the ongoing resilience in housing demand could help the bank’s mortgage business and bought some shares. But focusing on what I was looking for from the holding helped me think more clearly about how to view its role in my ISA.
I use a Stocks and Shares ISA to invest, not trade
Sometimes a special situation means that a share could suddenly gain value in a short timeframe. It can be tempting to make a short-term trade hoping for a fast buck. But I’m not a ‘trader’ and don’t want to be one.
Instead, I see a Stocks and Shares ISA as a way to build longer-term investments. While I do buy and sell, I don’t trade frantically hoping for sky-high returns. Instead, I do some spadework to uncover companies I think have good prospects. I then wait until I think their shares are undervalued. Using that insight, I invest.
