Since the FTSE 100 fell below 7,400 points in the middle of March, it has rallied strongly. It closed last week at 7,756 points. A sustained move higher could be seen over the summer, with forecasts pointing to falling inflation and a Bank of England that’s nearing the end of raising interest rates. In order to take advantage of this potential move, here’s how I’d position a Stocks and Shares ISA today.
Why use an ISA
Millions of Britons have an ISA, using it as an effective home for our stock investments. The benefit from an exemption of capital gains and dividend tax for holdings in the ISA means it allows investors to keep more of the profit.
I’m going to assume that an investor already has an ISA set up, with a fairly well-diversified portfolio of different stocks. Thanks to the £20,000 annual limit for new funds only starting in April, there’s little chance of having used up all of the allocation in May!
Tilt towards growth stocks
During a market rally, growth stocks tend to outperform. That’s why I’d be looking to add in companies that are in a good place right now to increase revenue and profit. Two examples I’m looking into more deeply are Virgin Money and 4Imprint. Both have seen their share prices double in the past three years.
Granted, growth stocks carry a higher level of risk due to more volatility in their share prices. Yet that’s where the existing diversified ISA comes into play. With plenty of stocks already being owned, some of the risk of the new stocks can be offset by more defensive shares in the ISA.
Pick up dividend stocks now
Another way to position an ISA now is to consider buying dividend stocks on our watchlists. Like many people, I have a watchlist of companies I’m keeping an eye on.
It’s a smart play to look to buy some of these income-generating stocks sooner rather than later, on the basis of a move higher in the stock market. The reason for this is the calculation of the dividend yield.
Let’s say the stock is trading at 100p, with a 5p dividend per share. This 5% dividend yield is attractive. Yet if the stock jumps to 120p over the course of this summer, the yield falls to 4.16%. So to lock in the higher yield, buying soon could be a smart call.
Risk but also reward
Granted, I can’t make any promises that the FTSE 100 will indeed have a brilliant summer. Even if inflation does fall, the impact of higher interest rates could cause negative economic growth. There’s still a chance this could result in a 2023 recession. That would hurt the stock market.
However, making some tweaks to an ISA to be ready for a rally doesn’t massively increase the portfolio risk. Yet it does allow for some potential outperformance if my thinking is correct.
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.
