Every year I try to maximise my Stocks and Shares ISA. That’s because I want to make my money work harder so I don’t have to.
Investing in shares can be lucrative, but there are risks too. Ideally, I’d like to maximise my returns and minimise my risk. Here’s how I’d get started.
Doubling a Stocks and Shares ISA
First, the simplest option could be for me to buy a FTSE 100 tracker fund. This would track the performance of the UK’s leading stock index.
The long-term performance for this large-cap index looks promising. On average, it has gained by 8% a year.
Note that if I achieve the same performance over the coming decade (and that’s not guaranteed), I’d double my money in nine years.
That’s not too bad, but what if I want to double my money in five years instead? To do that, I’d need to earn 15% a year. But just how likely is that?
It’s interesting to see that 25% of FTSE 100 shares achieved this return over the past decade, so it’s certainly not impossible.
Winning shares
For the best chance of finding these winners, I’d look for certain characteristics. First, I think smaller companies stand a better chance of achieving double-digit share price returns. That’s because they can often grow faster than larger and more mature businesses.
Many of the biggest winners from the FTSE 100 may have spent time as mid-cap companies in the FTSE 250 index, so I’d look there too.
I’d look for businesses that are experiencing earnings growth. I want to see companies that are steadily growing both sales and profits over several years.
But I also want them to make efficient use of their capital. That’s why I’d prefer companies that demonstrate double-digit return on capital employed (ROCE). This is a good measure of business quality, in my opinion.
Right now, a few shares stand out to me. These include Softcat, Games Workshop, Dunelm, Safestore Holdings and Greggs. I’d happily buy all of these shares for my Stocks and Shares ISA.
Growth with technology shares
To target 15%, I’d also look abroad to capture the largest technology companies. The past decade has been particularly kind to tech shares. In fact, the Nasdaq 100 achieved an annual return of 17%.
A word of warning, however. This tech-filled index might not perform as well over the coming decade. The US federal reserve has embarked on a journey of higher interest rates to tackle surging inflation. That’s typically not the best environment for high-growth shares.
That said, it includes many fast-growing and innovative companies like Tesla and Nvidia. It also includes the world’s technology behemoths that are superb, high-quality businesses. These include Microsoft, Apple, Amazon and Alphabet.
Overall, were I investing £20,000 in my Stocks and Shares ISA today, I’d split it into four parts. I’d invest £3,000 in a FTSE 100 index tracker, £3,000 in a FTSE 250 index tracker, £10,000 into my selected top picks, and the remaining £4,000 in a Nasdaq 100 index tracker. That may make a 15% target harder to achieve, but it should spread my risk sufficiently and avoid me putting all my eggs in one basket.