One of my earliest decisions as an investor was to make use my Stocks and Shares ISA allowance. I’m glad I did, as it’s meant I haven’t had to pay and capital gains or income tax on my investments.
The new tax year is soon arriving, so I’m looking ahead to see what investments I can make with £200 each month. For me, a Stocks and Shares ISA is still a great option, but it’s just as important I pick the right investments for my risk profile. Here’s my strategy for the year ahead.
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.
Buying funds in a Stocks and Shares ISA
It might not seem obvious given the name, but I can also buy funds in a Stocks and Shares ISA. There are two broad kinds of funds I can choose from: active and passive.
Starting with passive funds, such vehicles aim to replicate the performance of a stock index like the FTSE 100. They will never exactly match the performance due to the dealing costs of buying and selling the investments, and the fees I’d have to pay to the investment management company. Also, if there’s a stock market crash, by default, passive funds will crash along with the market. Nevertheless, these investments are typically cheaper than active funds, and mean I’m more diversified compared to buying single stocks.
I’d start off buying the iShares FTSE UK Dividend Plus ETF with £200 per month in my Stocks and Shares ISA. This fund aims to track the performance of the FTSE UK Dividend+ index. It’s generated a 12-month dividend yield of 5.5%, which I consider a good level of income for my portfolio.
I could also choose an active fund. This is when a fund manager attempts to beat the performance of a stock index. It could generate a higher level of income or greater capital growth. The fees are typically higher, though. And there’s never a guarantee that a fund manager will achieve the fund’s objectives.
Buying single stocks
Once I’ve built up a £1,000 stake in my chosen ETF, I’d switch to buying single stocks with my £200 investment each month. This strategy can be riskier as a lot rides on the performance of individual companies. Also, there’s a lot more research involved because I’d hope to fully understand the company before I bought any shares.
I’d start by investing in companies with strong economic moats. This is when a business is able to retain, or even grow, market share because its products or services are unique, or highly sought after. It makes it more difficult for competitors to eat into its market. A good sign of an economic moat is high profit margins. I think Auto Trader and Rightmove are two companies with economic moats as both companies have operating margins over 60%.
Stocks with high dividend yields are also an option for my portfolio. I own British American Tobacco and Legal & General as the yields are both over 6%.
Even though buying single stocks is riskier, I have a long-term horizon so they’re appropriate for my risk profile. I’ll be looking to buy these stocks with my £200 investment, switching which company I buy each month to ensure I diversify.