A lot of stock market watchers and analysts are predicting a bull market for shares in 2021. And the logic underpinning their optimism hinges on the Covid-19 pandemic receding and economies firing back up to full speed. But I’ve also seen arguments that the recent snap-back rally may have gone too far too soon and there could be another stock market correction on the way. So, what’s the best way to invest in a Stocks and Shares ISA in 2021?
Why I’d invest regularly in my Stocks and Shares ISA
I reckon one of the most important factors is to keep investing regularly. And investing £250 a month is a solid sum to start building up a nest egg. Indeed, by investing regularly it’s possible to form a good savings habit. And it overcomes the problem of finding larger lump sums to invest all at once.
But regular investing will also help me smooth out the volatility in the general stock market through the process of pound-cost averaging. By making regular monthly contributions into my ISA, I’d end up purchasing fewer units when prices are high and more units when prices are low.
The most important thing of all is to compound stock market gains from shares over time. And I’d do that by reinvesting dividends either automatically or manually and buying new shares if I ever sell an investment in my Stocks and Shares ISA. Those reinvested monies will work alongside the new money added each month to keep the overall investment pot growing over the coming years.
And the process of compounding tends to work exponentially, which is exciting because it means the annual returns get larger over time. And that’s why it’s important for me to invest for as many years as I can. But another factor that feeds into the compounding process is the figure for the annualised return I achieve from my investments.
Building a core and aiming to beat it
Many sources quote a figure of around 7% for the historical annualised return from shares in general. And over decades, compounding an average return of 7% a year will multiply out into a decent final sum. But many investors aim to beat that figure by selecting shares and share-backed investments carefully.
If I was starting from scratch with a Stocks and Shares ISA I’d likely take advantage of the low costs and low investment thresholds offered by many tracker funds. Those passive investments can form a decent core portfolio, to begin with. And I’d likely spread those early monthly investments between three or four tracker funds for extra diversification. For example, I might choose trackers that follow the FTSE 100 index, the FTSE 250 index, the FTSE Small Cap Index and America’s S&P index.
Then, later on, and after doing my own thorough research, I’d branch out into a few shares of carefully chosen individual companies and aim to boost my portfolio’s performance.