Stocks and Shares ISAs are a great tool to save for the future. Their most significant benefit is you don’t have to pay any tax on the profits you make inside an ISA wrapper. Indeed, you don’t even need to declare your ISA income on your tax return.
At the time of writing, investors can put away £20,000 into a Stocks and Shares ISA every year and, according to the most recent figures from HM Revenue and Customs, nearly a quarter of million savers opened a Stocks and Shares ISA during the financial year ending April. However, the average ISA subscription for the year was just £6,400, according to these numbers.
Based on these figures, I’m going to explain how I would invest £10,000 in a Stocks and Shares ISA today to achieve the best results for the long term.
Building the foundations
While £10,000 is a substantial amount of money, unfortunately it isn’t enough to build a diversified portfolio of single stocks. Therefore, I highly recommend investing this money in trusts and funds, which will allow you to invest in different asset classes around the world with relative ease and low costs.
The first investment I’m going to recommend is a low-cost bond fund. Bond funds are a great way to protect your money and achieve a rate of interest above that offered by high street banks. However, over the long term, bond returns are somewhat disappointing compared to equities.
With this in mind, I think it’s sensible to limit bond exposure to around 20% of assets. This will give your portfolio a steady base and income stream as well as reducing volatility. I would split the remaining 80%, or £8,000, across three stock funds and trusts.
Equity income
The next investment I recommend is a low-cost UK share fund tracking the FTSE All-Share. The index is made up of the 600 largest companies listed in London today, making up around 90% of the market’s value. This means it’s great way to invest in the UK market without having too much exposure to any single stock or sector.
In addition to a FTSE All-Share tracker, I think every portfolio should have some exposure to international dividend stocks. A great way to play this theme is with an investment trust. The Henderson International Income Trust is my favourite pick here. It currently supports a dividend yield of 3.2% and charges an annual fee of 0.8%.
And finally, I’d buy a growth-focused investment trust for this starter portfolio. By far the highest rated growth trust is the Scottish Mortgage Investment Trust. Over the past five years, it’s outperformed its benchmark by 42%, thanks to well-timed investments in US tech stocks.
Combined with an international dividend fund, low-risk bond fund, and well-diversified UK equity tracker fund, I think Scottish Mortage could help you achieve your long term financial objectives.
So, that’s how I’d invest £10,000 in a Stocks and Shares ISA today. Of course, if you’d like to buy single stocks, nothing’s stopping you. Indeed, if you’re willing to take on the risk, there are some growth stocks out there that have the potential to outperform the market substantially over the next few years.