Each April, my allowance to invest in my Stocks and Shares ISA resets. Currently, the amount sits at £20,000 per annum. This doesn’t mean I have to invest all of this, but it’s the maximum cap. The benefits of investing in stocks via an ISA are that any gains made from selling assets (or banking dividends) are free from capital gains tax. Even though I plan to hold my stocks for a long time, knowing there’s no tax on future gains is reassuring. So how can I best make use of my allowance?
Not panicking over my allowance
When I first opened a Stocks and Shares ISA, my initial concern was how I could afford to max out the allowance. Years later, I realised that this is the wrong way of looking at things. I want to invest sensibly, and only invest what I can afford to put in.
If I stretched myself and put all my free cash into stocks within my ISA, I could cause unnecessary issues. For example, I might have to sell stocks prematurely for a loss in order to fund a needed expense. So even though I can technically invest £20,000 a year, I might best use it by only investing half of that amount.
Another point regarding my Stocks and Shares ISA is that I’ve found it best to buy in chunks over the course of the year. This allows me to take advantage of moves over the 12 months. The stock market crash last year was one example of why it’s good to invest monthly or quarterly, rather than all in one go.
Using my ISA for long-term investments
My current investing aim might be to achieve capital growth. However, to make best use of my Stocks and Shares ISA right now, I’m better off investing in a mix of stocks. Some could be high-growth opportunities, like technology. Yet I might also decide to invest in some stocks that are paying out dividends. I could look at buying some undervalued mature companies too.
The reason for this is that my ISA is a long-term home for my stock investments. In years to come, my investing aims will probably change. So rather than having to completely shift my portfolio in coming years, building a mixed portfolio using my allowance now will put me in a better position further down the line.
A final point to best use my ISA allowance is to leave the funds within the ISA. For example, if I sell a stock, I’m better off leaving the money in the ISA as cash. If I take it out and then look to put it back in a few months later, it will come out of my current year allowance if I don’t have a flexible ISA.
Therefore, to enable me to invest to my limit, I’m better off not reducing my allowance from money I’d previously put into my Stocks and Shares ISA.
I personally think the ISA is a great tool for a stock investor like myself, but I do need to think smart when it comes to the way I use it to invest.
jonathansmith1 owns no share mentioned. The Motley Fool UK has no position in any 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.