As a believer in long-term investing, the timeframe of a Stocks and Shares ISA suits me well. By putting money in today and then investing it thoughtfully, hopefully I can build up a sizeable sum in years and even decades to come.
Setting goals and a plan for investing
Say I had £20k (though the same approach could work with lesser amounts, albeit the results would be proportionately smaller).
With building wealth as my goal, I could immediately think about what plan might help me achieve that goal. For example, I might focus on compounding dividends from income shares, buying growth shares, or a combination of both approaches.
Whatever my approach, I would want to reduce my risks by spreading the money over a number of different shares. Starting with £20k is ample to do this.
Finding shares to buy
I would be keen to avoid a mistake commonly made by investors seeking to grow the valuation of their Stocks and Shares ISA quickly. That is basically being greedy without being financially realistic.
For example, a share with an unusually high dividend yield might not keep paying out at that level. A growth share that has doubled in the past year might double in the next year. In either case, just paying attention to what has happened in the past is not necessarily an indication of what to expect in future.
Rather, I would focus on the underlying business and how I expect it to perform in the future.
Looking to the long term
As an example, consider an income share I own, M&G (LSE: MNG). The area it operates in – asset management – benefits from high demand and I expect that to remain the case. That can translate into sizeable fees. In turn, that helps firms like this to make profits and pay dividends.
M&G’s policy is to maintain or increase its dividend per share each year. Whether it manages to do that will depend on how its business performs. One risk I see is that a nervous market could mean asset values slump at some point, leading to lower profits for M&G.
From a long-term perspective though, I see a number of strengths for the firm including having a well-known brand and large customer base. At the moment, its dividend yield of 10% makes it into a group of the most generous dividend payers in the FTSE 100.
Getting started now
Buying into a diversified range of high-quality businesses when they have an attractive share price could hopefully help me build wealth over years to come.
My first move would be to choose the best Stocks and Shares ISA for me, put my money in and start finding compelling investment ideas.
This post was originally published on Motley Fool
