I’m in the building stage with my investments. So I’d aim to generate long-term wealth from my Stocks and Shares ISA.
And to do that, I’d focus on the process of compounding. In other words, I’d reinvest all the gains so that the money gained can itself be put to work in the stock market.
Indeed, billionaire investor Warren Buffett became so spectacularly successful because of the way he compounded his investment gains over many years. I’d aim to copy that approach, although my goals are a little more modest than aiming for the billions he’s achieved.
A personal investment style
But after identifying the process of compounding as the number one focus, the second consideration is strategy. It’s important for all investors to develop an investing strategy and stick to it. Indeed, an unfocused approach to investing can lead to poor returns.
However, for me, it took a long time to evolve my strategy to where it is today. And I’m forever nipping and tucking my tactics and techniques. Sometimes I do that because of outcomes and feedback from the market. And sometimes because of learning from other successful investors that have written books about how they did well in the markets.
And I believe continuous learning is an important part of being a lifelong investor. But a strategy — or style — for investing is often unique to every individual investor.
In fact, I reckon an individual strategy is essential. It must fit like a comfy fleece. And it should accommodate the individual’s emotional constitution, attitude to risk, time constraints and other considerations. In other words, it’s important to develop a strategy that’s easy to live with as well as being effective.
A strategy of two parts
So my strategy and style of investing may not be the same as anybody else’s. Nevertheless, let me explain how I’d put £20,000 to work within a Stocks and Shares ISA today.
Firstly, I’d allocate a portion of the funds to a hands-off, super-diversified section based on managed funds and trackers. The idea would be to capture the returns of the overall market. So I’d invest in trackers following various indices such as the FTSE 100, FTSE 250 and America’s S&P 500. And I’d choose a few managed funds and investment trusts with various investment strategies.
Secondly, I’d allocate a portion of the funds to a hands-on section aimed at beating the returns from the overall market. And to do that, I’d choose a handful of individual companies and invest in their shares.
And for the hands-on section, I’d focus on quality businesses. For example, they’d need strong balance sheets and the potential to grow their earnings over time. And just as Buffett does, I’d look for a valuation that makes sense of a long-term investment in the shares.
All shares carry risks as well as positive potential. And that’s because all the businesses behind them face operational challenges from time to time. But I’m optimistic my long-term approach will deliver a satisfactory investment outcome over time.
