A false start recommended bonds and gold — for a Stocks and Shares ISA!

A second try suggested 70% in global developed markets, 15% in emerging markets, 10% in UK stocks, and 5% in global small-cap stocks.

Well-diversified funds

It went entirely for exchange-traded funds (ETFs), with alternatives in each of the four categories — including the iShares Core FTSE 100 UCITS ETF and iShares FTSE 250 UCITS ETF index trackers for the UK equities portion. I rate those highly for ISA newcomers to consider as a way to get started, with diversification thrown in.

For global stocks, it suggested iShares MSCI World UCITS ETF (LSE:IWRD), and I want to take a moment to examine that. The fund aims to track the performance of its benchmark, the MSCI World Index.

To achieve that goal, the fund invests in companies on stock markets in 23 developed countries, and says it covers around 85% of the listed stocks in each country.

Over the past 10 years it’s hit the benchmark target pretty much bang on in every single year. And its fees are low, with a total expense ratio of 0.2%.

Reinvest now, cash later

The fund also has a version under the ticker symbol IWDA, which reinvests dividend cash. So investors can build up a portfolio today and then switch between versions to take dividend income in the future. Yes, this could be a good one to consider for starting a new Stocks and Shares ISA.

A fund like this provides a huge amount of diversification in just a single investment. But I’d still be wary of having all my money managed by one provider. Going for this kind of ETF-based ISA, it might be wise to considering choosing each fund from a different provider.

I think my biggest criticism is that this goes for too much diversification, if anything. And the UK stocks allocation is way too low for my liking.

A UK investor?

So I asked ChatGPT for some individual equity suggestions. And it went overboard on high-flying US tech stocks.

It ranked ‘US mega-cap compounders’ first, with ‘tech and innovation’ second — totalling 60% of its suggested cash allocation. In the list were Apple, Nvidia, Microsoft, Alphabet…

In another query I asked it to find the biggest Stocks and Shares ISA mistakes, and one of the top ones was… buying shares that have already gone up. Hmm.

I should put only 15% of my money in UK high-quality stocks, it suggested. In a Stocks and Shares ISA, valid only for UK residents? I invest in what I know, and I know UK stocks. So that’s what I mostly buy.

What to learn

Overall, there are definitely some interesting starter ideas here, but they mostly miss my needs. I’ll probably come back to it and try to narrow it down some more.

ChatGPT can be very good at searching and summarising large amounts of data. Just don’t make the mistake of thinking there’s any understanding behind it.

The post I asked ChatGPT to build the perfect Stocks and Shares ISA, and it said… appeared first on The Motley Fool UK.

Free money from the government

The beauty of contributing to a SIPP is that they typically come with tax relief. This is essentially a reward (free money) from the UK government for saving for retirement.

The amount of tax relief available depends on an investor’s tax bracket. But basic-rate taxpayers are entitled to 20% (for higher-rate and additional-rate taxpayers these are 40% and 45% respectively).

This means I can pick up a 25% return, risk-free, before I’ve even invested a penny of my capital.

In other words, if I was to put £5,000 of my own money into my SIPP, I’m looking at a total contribution of £6,250 (note that I’d have to lock this money away for the long term).

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.

Higher returns

It gets better though. You see, with a SIPP, there’s typically access to a wide range of stock market-based investments. This means I’ve the ability to generate an even higher return on my money.

Over the long run, the stock market’s generated a return of about 10% a year. If I was able to generate a 10% return on my £6,250 in year one, I’d be looking at total capital of £6,875. That would represent a return of 37.5% on my initial £5,000.

Aiming for 10% capital growth

Of course, I’d need to invest properly to achieve that 10%. One or two shares isn’t going to cut it.

But one shortcut I could use is to invest in a global exchange-traded fund (ETF) that provides one-click access to a basket of stocks.

A good example is the iShares MSCI World UCITS ETF (LSE: IWRD). This ETF provides access to around 1,500 stocks. And all the big, well-known companies such as Apple, Nvidia and Amazon are in the mix.

Looking at the performance track record, it’s actually generated returns in excess of 10% annually in recent years.

Indeed, for the five-year period to the end of February, it delivered a total return of 71.5%. That equates to an annualised return of about 11.4%.

Of course, past performance isn’t an indicator of future returns. While the stock market tends to rise in the long run, it can be volatile in the short term.

A drop in economic growth, a dip in corporate earnings, a flare up in geopolitical tension, or a ‘black swan’ event could cause a decline.

Even if market returns were poor in the near term, I’d still have my tax relief. This means the chances are I’d still beat returns from savings accounts.

The post 5% from a savings account? I’d rather aim for a 38% return from a SIPP appeared first on The Motley Fool UK.