With the Stocks and Shares ISA deadline looming, I have been thinking about how I would invest £20,000 right now.
Decide my objectives
Before investing £20,000, I would want to decide what my objectives are. To do this, I would focus on three key questions.
First, am I more interested in growth or income? Some shares may offer both, but others would be more or less attractive depending on whether I was hoping for share price growth or dividends. A simple way to do this would be to assign a percentage. For example, I could go for a 100% growth focus, a 100% income focus, or a 60%/40% growth/income focus.
Secondly, I would think about my timeline. Am I putting the £20,000 aside with the intention of not touching it until I retire? Do I hope it will help me fund school fees in a few years? Or do I want to start generating passive income in the next several months? My investment horizon may influence what sorts of shares I decide to buy.
Thirdly, I would think about my risk tolerance. £20,000 is enough to let me comfortably diversify my Stocks and Shares ISA across different businesses. That will help reduce my risk if a particular share does badly. But I can also decide whether I want to stick to blue chip companies with proven business models, or racier startups that are yet to turn a profit but might have dynamic growth prospects. I think figuring out my own risk tolerance will help me zoom in on certain kinds of businesses. But even then, no share is ever free of risk.
Draw up a long list
Based on that, I would set aside a couple of hours to sit down and draw up a long list of companies I might be interested in investing in. Those could be companies in which I have already invested, as well as ones that would be new to my portfolio.
Next I would put those companies into priority order from most to least attractive, based on how well I felt they might perform and also their fit with my objectives. Once I had my top 10, I would focus on them. In fact, depending on my risk tolerance and how much I wanted to diversify, I might zoom in on just the top five.
From this list, I would think about how splitting my £20,000 equally between them could fit my objectives. For example, on my own list I might include financial services companies such as M&G, Direct Line and Legal & General. But I do not want to concentrate my portfolio too heavily in a single business area. So, with three financial services in my top 10, I may cross out the least attractive of them and add the next company on my list.
Split the money
I would then decide how to allocate my £20,000 to these companies I have chosen. I could do this simply by splitting it evenly between them, or by putting more into the ones I liked best.
My preferred approach would be to split the money evenly. Remember – I have already spent time choosing the shares I think have the best prospects. So, my top five or ten shares should hopefully all be companies I think have solid prospects. But I do not know exactly how each one will do. Spreading my money equally between them means I will not suffer as much when a share does badly as if I had put a large amount of my funds into it.
Finding shares for a Stocks and Shares ISA
I do not think it would be difficult for me to find businesses I felt looked good and that I would be happy to own in my Stocks and Shares ISA. When it comes to price, however, it might be a different story. There could be companies I find attractive due to their business outlook – but not at their current share price.
One way around this can be to put money into my ISA without investing it all immediately. But fortunately there are some shares that I think offer me good value right now and that I would consider for my Stocks and Shares ISA. For example, I think self-storage operator Safestore should benefit from growing demand in its industry for many years to come. That could attract more competitors – a risk to profit margins – but I like the long-term growth story here. Last year, the company grew revenues by 15% and earnings per share more than doubled.
I also like the growth prospects at JD Sports. Its retail expertise, strong brand, and growing international footprint could help the company continue its run of growth. Increased logistics and manpower costs could eat into profit margins. But as a proven player in a market I expect to see ongoing demand growth, I would happily buy JD Sports as a growth pick for my Stocks and Shares ISA.
Income shares to buy now for my ISA
Similarly, I see a number of income shares I would consider buying for my ISA. Financial services company Legal & General is one. With its 6.7% yield, the company would hopefully generate around £134 of passive income in my ISA next year if I invested £2,000 in it now. Moves to simplify insurance pricing could hurt profits. But the firm’s strong, established reputation should help it for a long time, I reckon.
I also like the income prospects afforded by British American Tobacco. Declining cigarette use risks revenues and profits, but for now at least the company’s premium brands like Lucky Strike allow it to raise prices to help cover falling sales in some markets. Meanwhile, its rapidly growing range of non-cigarette products should benefit from its manufacturing, distribution, and sales expertise. The shares offer me a 7.2% yield.
Buy and hold
Having made my choices, I could invest £20,000 in a Stocks and Share ISA. After that, I would only pay a little bit of attention to it in the short term, although I would happily receive any income the shares generated.
By choosing shares for their long-term outlook, I would be building my ISA as a source of possible growth and passive income for many years to come. If enough of my selections turn out well, hopefully it will be a lucrative approach overall.
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Christopher Ruane owns shares in British American Tobacco, JD Sports, M&G and Safestore. The Motley Fool UK has recommended British American Tobacco. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.