The Stocks and Shares ISA is a tax-free vehicle for my investments. The wrapper is easy to set up and can be managed via a host of platforms. I’ve always used the Hargreaves Lansdown platform as, for me, it’s the market leader for a reason.
And, like many Britons, I’m starting the new year with the resolution of investing more in my Stocks and Shares ISA. But I don’t just want to be putting money aside and watch it stagnate. I’m investing to generate long-term wealth and hopefully get rich.
How am I doing it? Let’s take a closer look.
Making sensible choices
It can be hard not to get drawn in by huge dividend yields and growth stocks that look poised to carry on surging at exponential rates. But, in reality, big yields are often a warning, and I have to be aware that many growth stocks fail.
Instead, I favour a balanced portfolio, with the majority of my money invested in dividend-paying value stocks. This is because I’m fairly risk averse and I’m investing for the long run, allowing me to utilise a compound return strategy rather than hoping for growth.
Learning from the best
Warren Buffett is the inspiration for many value stock investors. And the so-called ‘Oracle of Omaha’ have several tips for us all.
Firstly, Buffett tells us to invest in what we know best. This allows us to better understand the merits of our investments. After all, it’s hard to evaluate an investment if I don’t truly understand the industry or the stock.
This is all part of developing a systemic approach to investing, based on buying stocks that are meaningfully undervalued. For the legendary US investor, this involves only buying when the market price is substantially less than a stock’s intrinsic value.
Finding undervalued stocks
There are several metrics that I can use to work out whether stocks are undervalued. I can look at metrics such as the price-to-earnings or price-to-sales ratios and compare these against peers in the sector.
A more sophisticated approach might involve using the discounted cash flow model. This is a valuation method that estimates the value of an investment using its expected future cash flows. It can be a little tricky to calculate, but thankfully there are several online resources to help me.
Compound returns
I also use a compound returns strategy. This involves investing in stocks paying dividends and then reinvesting these dividends year on year. It’s a snowball effect — the longer I leave it, the more it grows.
For example, if I started with £1,000 and invested it in dividend stocks with 5% yields, and then invested another £100 a month, while increasing my deposits by 5% each year, after 10 years, I’d have £21,000.
But, with compound returns, the gains grow massively the longer I leave it. After 30 years of this strategy, I’d have £158,000. After 40 years, I’d have £350,000. And these calculations don’t take into account share price growth.
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.
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James Fox has positions in Hargreaves Lansdown Plc. The Motley Fool UK has recommended Hargreaves Lansdown Plc. 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.
Motley Fool UK 2022
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