A stocks & shares ISA is one of the most tax efficient ways to invest in the stock market in the UK. That’s said are British adults using their ISA allowance to their full potential? The data, would suggest that they are not…
According to data compiled by Finder, less than 5% of Brits have a stocks & shares ISA. I find this statistic to be amazing. Here are a few more:
- The average adult stocks & shares ISA has £9,331
- The average junior stocks & shares ISA has £1,465
- In total there is £22.6 billion in adult stocks & shares ISAs
- In junior stocks and shares ISAs, there is more than £419 million
- The average annual rate of return for stocks & shares ISAs between April 1999 and April 2020 was 5.4%
From the above figures we can clearly see that British adults are not using their ISA allowance to their full potential, so what can we do about it?
Identify your investment goals
Before you even open your stocks & shares ISA you need to think, “why do I want to invest”? There are many reasons someone might want to start investing, I could be for long term wealth creation, retirement, or long term savings i.e. to pay off the mortgage.
You also need to think about what kind of investor you want to be. Do you want to invest in individual stocks or ETFs, do you want to be a growth or dividend investor? There are a lot of things you need to think about before you even make your first deposit.
It may help to write this all down, that way you can see it clearly and come back to it later to review. Make sure you set out a clear series of goals for you to hit along the way, e.g., a series of portfolio value goals or dividend payout goals. Think about the time frame you want to work towards and how much to contribute every month.
Start small, learn about stocks and build habits
What ever you do, don’t throw in all your money and YOLO into a few stocks. Trust me, it doesn’t tend to work out very well. Start small with a regular monthly deposit to get you started. This will allow you to make a few mistakes, which you will make, without you loosing all your money.
Start dedicating a portion of your time to learning about stocks. Even with ETFs and index funds you still need to do your research. With ETFs you need to look into the expense ratio, composition, risk profile and historical returns. A good place to do this research is JustETF. Here you have all the information you need to do your research in one place, including KIID and fund fact sheets as PDFs all for free.
Get into the habit of looking into company fundamentals. This means looking at the financial figures underlining the companies performance. These include revenue, gross profit, free cash flow, and assets/liability balance sheets. By looking into this information you will be able to see long term trends in company performance and even be able to assign a fair value for its share price. This takes a lot of practice and getting used to so start early.
Start as soon as you can
A common saying when it comes to investing is, “the best time to start was yesterday, the second best time is today.” Even if you are starting out at £10 a month, it is better than nothing; the important thing is that you start. The reason you need to start early is because of a little thing called compound interest.
Albert Einstein supposedly said, “compound interest is the eighth wonder of the world.” He also went on to say that, “he who understands it, earns it. He who doesn’t, pays it.” If you start early and you Continuously reinvest any gains, including dividends, into your portfolio; any future gains will be compounded.
For example, if I invested £10 and achieved a 10% rate of return I would have £11 total. The following year, if I continue to achieve a 10% rate of return I would end the year with £12.10. But if I had withdrawn the gain at the end of year 1 I would still only have £11. If I was the scale this up to £100 per month over 30 years achieving 8% annually, you would end up with £140,855. Now if you save £100 in the bank at 0.05% you would only have £36,270.
Think long term
Take a look at the bellow charts of the S&P500 stock market index, one is from a 1 day view and the other is all time view.
Notice how the 1 day outlook of the S&P 500 index looks bad, but when you zoom out and look at its all time performance it is up 3,261%. This is the same with many individual stocks, you will have ‘red’ days but if the fundamentals of the company are still sound then you should have nothing to worry about.
On many occasions periods of down trend in the stock market could be good buying opportunities. Take March 2020 for example, the entire stock market had fallen 30+% but there were still many companies that were in a really good position. Therefore, you could say these companies were trading at a 30+% discount and the were ‘on sale’.
Remember that over the short term the market will fluctuate but long term those fluctuations should even out to steady growth.
Diversify your investments
When it comes to diversification of investments many look to the example of Warren Buffett who said, “diversification is a protection against ignorance.” Essentially, for the average investor who is just starting out it is often advised to invest through an ETF which holds 100s of different companies. The advantage of that is that your risk is spread out over all those companies within the fund.
Alternatively, you could just not invest in the one company. Say you have £5,000 to put into a stocks & shares ISA you could put this all into an ETF which is highly diversified. However, you could also spread this across 10 companies putting £500 in each. But remember what Buffett said, protection against ignorance. Therefore, if you are going to invest in individual companies make sure you keep on top of news and financial updates from those companies.
None of the content in this article should be considered financial advice, I am not a financial adviser and you should always do your own research prior to investing. These are my opinions only.