Putting money into a Stocks and Shares ISA, then buying stakes in great businesses can be a good way to try and build long-term wealth, earn passive income, or both.
However, while some investors become millionaires on the back of their ISA, others look at their statements and wonder why they ever bothered.
Part of this could potentially be avoided by watching out for and avoiding some beginner’s mistakes – errors that can also dog the performance of more seasoned ISA investors.
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Here are three.
1. Not having a clear goal
In most activities, it helps to know where you are aiming to go.
Even if you change your mind along the way, having a clear direction can help you make rational choices that hopefully move towards that specific objective until you alter it.
It is the same with investing.
For example, consider dividends. If a share has a dividend yield of 8.7%, does that sound attractive? Legal & General (LSE: LGEN) has that.
What about a share that loses value, falling 24% in just five years? Is that attractive? Again, Legal & General has done that.
There are lots of things that help determine an investment strategy, from how to balance between growth and income objectives to deciding what valuation metric to apply when considering shares to buy.
Different investors can make their own choices about what works for them. But having a clear goal will help them do that.
2. Speculating instead of investing
Now, someone might think that because the Legal & General share price has fallen almost a quarter in five years, it is attractive, because maybe it will bounce back.
Maybe it will.
But allocating an ISA on that sort of logic is not investing at all. It is speculating.
There are lots of good reasons to own Legal & General shares in my book, which is why I do.
The market for retirement-linked financial products is huge and resilient. Legal & General has a strong brand and big customer base.
It has been consistently profitable in recent years and used its cash flow generation to help fund generous dividends.
But there are also good reasons not to like Legal & General shares. Profits have been falling. The dividend per share is still growing, but at a slower rate than before.
Different investors seeing the same share in a different light is what makes a market a market.
But speculating, whether on momentum or businesses you do not understand, is not investing.
In my ISA, I aim to follow some basic principles of how to be a good investor. Avoiding even one costly mistake (such as investing in the ‘next big thing’ without understanding its business) could make a big difference to my ISA’s long-term performance.
3. Try to build wealth for yourself, not your stockbroker!
A simple way to try and improve an ISA’s performance is choosing the right one in the first place (and then reviewing that choice from time to time).
Fees, costs, and commissions can eat into an ISA badly over time.
So I think a canny investor will weigh up the different options available rather than paying an ISA provider through the nose for no reason!
