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A Stocks and Shares ISA gives investors like me the chance to invest in the stock market without paying dividend taxes or capital gains taxes. I think it’s a great opportunity.
With £20,000 to invest, a good strategy is to divide it into smaller amounts and invest steadily throughout the year. There are some downsides to this, but, I think there are also big advantages.
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.
Market timing
Regular investing involves buying a certain amount of stocks and shares at a fixed time. In the case of a Stocks and Shares ISA allowance, that might be £1,666 every month or £5,000 each quarter.
This approach has a couple of advantages. The first is that it avoids the difficulties of trying to work out where share prices will go next.
Someone who invests on a set schedule doesn’t need to worry about whether share prices will be higher or lower three months from now. Their plan is to buy their allocated amount regardless.
As long as the stock market goes up over time – which it generally does – someone who invests gradually will do well. And they’ll do it without having to predict share prices in the short term.
Buying low
The other big advantage of regular investing is that it automatically involves buying more when prices are low. Take Lloyds Banking Group as an example.
Over the last five years, the Lloyds share price has been up and down. But someone who has invested each quarter would have bought most of their investment when the stock was cheap.
At the start of the year, for example, the Lloyds share price was around 47p. So someone investing £5,000 in Lloyds in January would have bought 10,638 shares.
Since then, though, the stock has fallen to around 42p, meaning that £5,000 buys 11,904 shares. By investing the same amount regularly, someone would buy more shares when the price is lower.
Buying high?
There is a potential downside to consider with regular investing, though. It looks like it involves committing to buying shares in companies even when they’re overpriced.
Right now, Nvidia shares look quite badly overvalued to me. But if I had a policy of buying the stock each month, I’d have no choice but to invest at today’s prices.
I think there’s a way around this, though. Rather than committing to buying a specific stock, I’d look to invest a certain amount regularly in whatever I think the best opportunity at that time is.
Sometimes the best stock to buy might be Apple, other times it might be Unilever. One of the nice things about investing in this way means I would likely build a diversified portfolio over time.
Aiming for a million
The number of ISA millionaires in the UK seems to keep going up and up each year. Joining their ranks will take time, perseverence, and probably some luck.
I think, though, that regular investing gives people like me the best chance at building wealth through the stock market. Whether or not I reach the £1,000,000 mark, it’s probably the best strategy for me.
