With the Stocks and Shares ISA deadline (5 April) fast approaching, investors are rushing to maximise their £20,000 annual allowance. But while transferring money into the account is easy, finding the best stocks to invest in can be a daunting task, especially for those at the beginning of their investing journey.
With that in mind, let’s take a look at how I would invest my first £20,000 in a Stocks and Shares ISA if I were starting from scratch in 2022.
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.
The timing couldn’t be better (probably)
With rising inflation on the back of the pandemic triggering higher interest rates, and trouble festering in Eastern Europe, stocks have been hammered pretty hard in recent months. But while the latter is tragic and the former concerning, neither situation is likely to cause severe long-term disruptions to most top businesses.
Despite this, plenty of these companies (even those with virtually no debt or ties to Russia) are now trading a significant discount. In other words, the recent stock market tumble has created what I believe is an incredible buying opportunity for my Stocks and Shares ISA.
But with thousands of public companies to choose from, where should I start when building a portfolio from the ground up?
Picking companies for my Stocks and Shares ISA
As a fresh investor, it’s easy to be lured into the realm of risk after hearing stories about penny stocks exploding overnight. But as exciting as this prospect may be, these opportunities can be tough to spot and, in most cases, penny stocks are worth pennies for a good reason.
Instead, I would take a safer-yet-still-lucrative approach of buying established industry leaders. For example, Apple and Mastercard in the US, or Next and Ocado in the UK. Obviously, these are hardly the most exciting companies out there. But sometimes boring can be worthwhile.
In fact, over the last five years, if I invested £20,000 equally across all four of these companies, I’d have around £52,340 today – a 162% return. And thanks to my ISA, these gains are immune to the taxman’s grubby fingers.
Knowing the risks
Even if I focused solely on industry titans, my portfolio would not be immune to risk. The stock market can be a volatile place. And many once-leading businesses can quickly be demolished by fast-growing disruptive start-ups, or external forces beyond the firm’s control. The latter was made perfectly apparent for the travel sector when Covid-19 struck in early 2020.
Investors can’t do much about general market risk. But fortunately, the impact of company-specific threats can be mitigated through diversification. After all, if one out of 20 companies in my ISA starts to tank, then only 5% of my portfolio is exposed. Meanwhile, the returns from my better-performing positions can often erase any losses from the worst performers.
A final thought
My approach to investing £20,000 in a Stocks and Shares ISA has proven to be lucrative for my own portfolio. But it may not be suitable for everyone. Why? Because different investors have different financial goals, time horizons, and risk tolerances.