Taking advantage of the annual £20,000 allowance for a Stocks and Shares ISA strikes me as a no-brainer. Doing this means I won’t be taxed a penny on any profit I make or income I receive. Over an investing lifetime, that could amount to many thousands of pounds!
But where should this money be invested? Well, that’s a personal decision and dependent on lots of factors. However, I can tell you what this 40-something Fool is doing.
Growth-focused
To me, tilting towards growth stocks makes sense, at my age. With roughly 25 years to go before I can access the State Pension, I want to build up my wealth. That means focusing on capital gains — selling something for a whole lot more than I paid for it.
When it comes to identifying the best stocks to spend my ISA money on, I look for a few things:
- Room to grow: I want to own companies that have lots of opportunities to keep expanding, in terms of products and services and/or geographical areas. Health and safety tech firm Halma springs to mind.
- Low/no debt: When things get tough (like now), I want a company that’s financially healthy. So anything with a lot of debt is off the table. Rolls Royce shares? Not for me.
- High returns on capital: This is when a company makes a lot of money from the cash it puts to work. Doing this year after year should mean it compounds in value. Fantasy figurine maker Games Workshop easily ticks this box.
- A market-leading position: Like billionaire investor Warren Buffett, I love companies that are able to fend off competition again and again. Think property portal Rightmove.
No income stocks?
All this talk of growth and more growth probably sends a message that I have no interest in dividend-paying stocks. Not true. Quite a few holdings in my Stocks and Shares ISA send cash my way twice a year. However, it’s what I do with that cash that’s important.
Instead of being tempted to spend the money I receive, I have — without exception — always reinvested it. Buying more shares helps my ISA grow in value like a snowball shoved off a hill.
In time, I’m sure I’ll own far more income stocks. The intention at this point will be to use my accumulated capital to cover some of my everyday expenses and a few (or many) treats.
Easy? Not quite.
Risky business
As 2022 has shown, the market doesn’t care about the performance of my Stocks and Shares ISA, or financial goals. Growth companies, including many I own, have tumbled in value as investors get concerned about interest rates going higher.
Sadly, there’s nothing to stop their share prices from heading even lower either. Put to work, my £20,000 allowance could easily be worth a lot less by the end of the year.
So how do I cope?
Be Foolish
My solution is to think long term. That means not exchanging long-term opportunities for near-term certainty (if there is such as thing!) and buying what’s flavour of the month. Oil and gas stocks? Tobacco giants? Banks? No thank you.
If this means not checking my portfolio so often, so be it. I reckon my future self will thank me eventually.
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.