It is less than a month until the New Year. As an investor though, that means I still have around four months before my current ISA allowance expires. At that point, I will get another year’s allowance (unless the government monkeys about further, as it did with the proposed British ISA).
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With lots of potential to invest my ISA in 2025 and beyond, here are three mistakes I will be seeking to avoid.
Mistake 1: ignoring seemingly small costs
What is the difference between 1% and 1.5%? At face value, it may seem like there is little to chose. But an ISA is a long-term investment vehicle – and over the long term, seemingly small differences can add up.
For example, imagine £20k gets chipped away by 1% a year. After 20 years, it will be £16,358.
What if it gets chipped away by 1.5% each year for the same period? I will end up with £14,783. That strikes me as a big difference.
Before even considering how to invest my ISA then, I look at what options may be suitable for me and what charges each will impose.
There are lots of choices available so I want to make the choice that best suits my own financial circumstances and objectives.
Mistake 2: going ‘all in’ on one big idea
Still, even if the charges are higher, maybe I could still make bucketloads of cash if I choose the right shares?
Yes, I could. Putting a £20k ISA into Nvidia stock five years ago, for example, would mean I was now sitting on shares worth over half a million pounds (£547,000, in fact).
But such runaway successes are the exception not the rule – and even the best company can run into unforeseen difficulties.
So wise investors always spread their ISA over a range of shares.
Mistake 3: failing to spot a potential value trap
Another mistake is buying a share with an unusually high dividend yield, only to see it cut.
For example, Diversified Energy Company (LSE: DEC) and its 7% yield may look appealing. A few months ago though, that yield was actually quite a bit higher.
The company that specialises in buying up old gas wells has slashed its dividend. Not only that, the share price has tumbled 48% in five years.
That does not surprise me. High-yield shares that cut their dividend often see a share price fall as a result.
Diversified has some things going for it. It owns tens of thousands of wells. Thanks to its secondhand purchasing habits, it does not need to spend on exploration like many oil and gas majors do.
But it has borrowed heavily as it has grown, while facing risks from the cleanup costs of old wells to volatile energy prices.
I do not own this share partly because I fear such risks mean even the current dividend, though smaller than it was formerly, could be cut again.
If I had bought Diversified for my ISA before its dividend cut, I may now think I had fallen into a classic trap. That is one mistake I am always keen to avoid!
This post was originally published on Motley Fool
