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Stocks and Shares ISAs are extremely flexible investment vehicles. UK residents can invest up to £20k a year tax-free in a wide range of assets, including funds, stocks, and commodities.
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.
The trick is to know which assets to choose as there are so many options out there. With that in mind, here’s how I’d allocate my £20k annual allowance to aim for long-term wealth.
Striking a risk/reward balance
I find I’m often torn between a choice to invest in a safe and stable asset with minimal growth potential, or a high-risk, high-growth asset. On one hand, returns are low but I can sleep easy at night. On the other, I’m anxious but could net great returns.
The solution? Do a bit of both.
An investment strategy I like is called ‘core-satellite’ investing. It involves investing a lot of money into stable options while reserving a bit extra for more risky assets. Stable options typically include funds like ETFs, investment funds, or global equity funds. These managed funds spread the investment across a wide range of assets, reducing risk through diversification. They seldom return more than 5% per year on average but have a very low risk of collapsing completely.
On the flip side, there’s individual shares in high-growth industries like tech and energy. These investments can sometimes earn up to 20% or more in a single year but are at increased risk from environmental, economic, and geopolitical factors.
Core investing
One example would be the iShares S&P 500 ETF (LSE:IUSA). It provides exposure to top-name US stocks like Microsoft, Apple, Nvidia, and Amazon. Fund manager BlackRock carefully allocates the investment across stocks on the S&P 500 index, one of the best-performing indexes in the US.
Over the past 10 years, the iShares S&P 500 ETF has delivered annualised returns of 12.48%, slightly higher than its S&P 500 benchmark. Only once in 2014 did it perform below the S&P 500 average. However, since it’s focused on a single index in the US, it is prone to any economic risk the country faces. The S&P 500 is also heavily weighted towards tech, leaving it more exposed to risks in this specific industry.
Satellite investing
Take Facebook’s parent company Meta (NASDAQ: META), for example. This mega-cap US stock has risen 631% in the past 10 years, delivering 22% annualised returns. So while this stock is also part of the iShares S&P 500, any money I invested directly into it would have netted me almost twice the returns. However, if Meta failed, all that money would be gone. However, my core investment would only take a small hit.
Meta currently has a fairly high price-to-earnings (P/E) ratio of 25 — slightly higher than the industry average but on par with similar big-tech companies. Having risen 63% in the past year (almost triple the US market) it may struggle to gain more from here. CEO Mark Zuckerberg recently invested a lot into AI, a highly speculative bet that could pay off handsomely – or crash and burn. I think it will work out well for the company but only time can tell.
This is why it’s important to always diversify! I like to keep around 60% of my portfolio in funds and 40% in individual shares.
