With the dawn of another tax year, another ISA allowance begins. That seems like as good a moment as any to reflect on some ways in which people aim to build wealth in their Stocks and Shares ISA.
Here are three I use.
1. Sticking to what you understand
It can be tempting in the stock market to chase the next hot thing.
There is nothing wrong with that in itself. But my approach to investment is built on buying shares and holding them for the long run. I am not trying to buy a share just because I expect it will soon be worth more and I can offload it onto someone else. I see that as speculation.
Rather, I am trying to buy a small stake in a company I think offers a combination of strong long-term commercial prospects and an attractive share price.
That judgement can be hard enough to make at the best of times, so I try to improve my chances of success by sticking to business areas I feel I understand and can assess.
2. Be clear about why a share could make money
Sometimes a share has a big dividend – yet even that cannot make up for the decline in its share price over time.
On other occasions, a business performs brilliantly but its shares, already priced for very high expectations, actually move down not up.
Some shares have done brilliantly in the past, but something in their market has changed that means their future performance will be worse.
A Stocks and Shares ISA can grow in value thanks to capital gains, dividends or a combination of both. But it can also lose value due to falling share prices.
So I think it is helpful for an investor always to be clear about how they hope a particular share may help them build wealth.
For example, consider my holding in brewer and distiller Diageo (LSE: DGE). It has grown its dividend per share annually for well over three decades. Its premium brands like Guinness give Diageo pricing power that could help support ongoing dividend growth.
But the yield is 3.9%. That beats the FTSE 100 average of 3.4% but is still well below the yield I earn from some other blue-chip shares. So why do I hold Diageo shares?
I think the company is undervalued. The share price has crashed 29% in the past year. That reflects a raft of risks, from weak demand in Latin America to the potential impact of tariffs on the export-driven business.
And I believe the share now looks relatively cheap for this quality of company. I am hopeful that I can make money from owning Diageo shares over time, not just because of dividends, but also as the share price hopefully moves closer to what I see as a fair level.
3. Build your own wealth, not your stockbroker’s!
Earning money in a Stocks and Shares ISA sounds good — but that can leak through an investor’s fingers if they pay more than necessary in fees, costs, commissions, charges and the like.
Over time, even small-seeming costs can add up. So a savvy investor will compare options for different Stocks and Shares ISAs, whether for a new ISA this tax year or transferring an existing one.
This post was originally published on Motley Fool
