Different people take a variety of approaches as they try to build long-term wealth. I put money into my Stocks and Shares ISA then use it to invest.
If I had a spare £20,000 to put to work in the stock market today, here is how I would go about it.
Weigh risk and reward
I would think about my investment objectives first. There are different ways I could try to go about that. For example, I may be willing to settle for a small gain in wealth, but with limited risk.
Or I may want to be very ambitious. Perhaps I am willing to accept large risks because I am aiming for outsized rewards in my Stocks and Shares ISA.
Each investor is different. So I would be clear on my own objectives — and what that means for my risk tolerance.
Set an investment strategy
Next, I would consider how I wanted to try and achieve my objective. I would devise an investing strategy that I think matches my objective.
For example, if I want to invest in blue-chip companies that I see as low risk, I may decide to limit my search to FTSE 100 companies. I could also use other criteria, for example only investing in companies with a consistent track record of generating free cash flow.
Alternatively, with an objective of setting up passive income streams ahead of retirement, I may adopt a strategy of putting the whole £20,000 into income shares.
There is not necessarily a right or wrong investment strategy for how I handle my Stocks and Shares ISA. But some will be more suitable than others depending on what I have decided my investing objective is. Setting a plan and sticking to it could help me take the emotion out of stock picking and, hopefully, make me a more rational investor.
Finding shares to buy
No matter what my risk tolerance is, I would still use some basic risk management techniques. For example, I would diversify my ISA across a variety of different companies. £20,000 is enough to do this and I would split the funds equally across five to 10 shares.
Hopefully I could increase my wealth over the long term, thanks to growth in the price of the shares I buy, compounding the income I get from dividends, or a combination of both. To try and do that, I would use my investment strategy to hunt for shares to buy.
For example, part of my strategy is to generate income from longstanding industries with large free cash flow generation. That strategic approach has led to me owning shares in British American Tobacco and rival Altria. Falling cigarette sales are a risk to profits though, so tobacco is only one sector in my diversified portfolio.
Whatever choices I make, I think following a logical thought process could help me as I invest the £20,000. Knowing what I want to achieve from my Stocks and Shares ISA, along with how I hope to do so, could be a helpful guide as I hunt for shares to buy.
