UK investors have many ways of putting their money to work, but in my opinion, the Stocks and Shares ISA is one of the best out there. With £20k of tax-free investing every year, it can be a real gamechanger over the long term.
I’ve been investing for nearly a decade now, and I’ve got four areas I always focus on when building my plan for the year ahead.
1) Owning quality
Good investing is all about buying at the right price. This sounds easier than it is in reality, but for investors willing to do the work, the returns can be tremendous.
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Many investors will not want to research and invest in individual stocks, but having an understanding of what is in a portfolio, and how much it could be worth, is an approach which can be used for any type of investment.
This strategy isn’t always easy. The stock market can be a confusing place at times, where companies performing poorly can see enormous rallies in the share price. Conversely, a business doing all the right things can see declines for years at a time. However, over the long-term, these things tend to balance out, and I care more about returns over decades than on any given day for my Stocks and Shares ISA.
2) Diversification
As I noted, the daily movements of the stock market can be chaotic at times. To combat this, having a diverse range of assets in my portfolio is essential. Having an appropriate level of exposure to different markets, countries, and sectors means that any declines can be generally offset by the long-term upwards trend of the global stock market.
Investors who have been around for a few years may remember energy stocks going on a tear in 2022, and technology stocks doing incredibly well at other periods. By investing in both areas, my portfolio has been able to balance out short-term disruption.
3) Risk management
Investing is often a test of mindset. The market typically sees a decline of at least 10% every couple of years, so having a strong stomach, and confidence that any downturn is only temporary, is critical to success.
To make this easier, many investors will look to index funds, such as ones that track the S&P 500 or FTSE 100, encompassing hundreds of the best companies in the US and UK.
By owning hundreds of companies, the short-term performance of any given company is much less noticeable.
4) Keep searching
A good investor is always on the lookout for new opportunities.
Medical production specialist Smith & Nephew (LSE: SN.) has all the hallmarks of an interesting opportunity, with a valuation currently 35% below fair value according to a discounted cashflow calculation. The company specialises in orthopaedics, sports medicine, and advanced wound management, providing essential components for hip and knee replacements among others.
Of course, a good investor also keeps an eye on the risks of a potential investment. In the case of Smith & Nephew, these include a high level of debt and profits slowing down by 19% in the last year.
However, the future looks good for the sector, as demographics indicate a growing demand for innovative products, with earnings growth predicted to be 21% for each of the next five years.
For my Stocks and Shares ISA, I’ll be watching this one closely.
