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A stocks and shares ISA can be a great tool for people to consider using for their investments. UK investors do not pay dividend or capital gains tax on the shares they buy and sell within the ISA. For someone just starting out and opening an ISA, here are three ways to try to build a solid portfolio that can withstand volatility over time.
Assignment to defensive actions
Defensive stocks often come from sectors such as consumer staples and utilities. Companies that provide goods and services are considered needs. As a result, revenue and profitability should not be materially affected during a recession. Therefore, these stocks typically outperform consumer discretionary and other similar sectors during a volatile period.
By considering allocating a portion of ISA funds to defensive stocks, an investor can attempt to smooth out volatile portfolio performance. Of course, such actions are unlikely to provide huge share price gains. But they can help protect an ISA over time.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Diversify in different ways
Having several different stocks in a portfolio is a great way to reduce risk. After all, with a dozen stocks, when one has a problem, the impact is less than if you only had that stock.
However, some investors forget to diversify through other means. For example, having exposure to companies from around the world, rather than just those in the UK, including stocks listed in the US or with a large base in Asia. If the UK is struggling, the portfolio should not necessarily underperform.
<h2 class="wp-block-heading" id="h-make-smart-use-of-income-stocks“>Make smart use of revenue reserves
Some investors think that when they are paid a dividend, the best thing they can do is take the money and spend it. Admittedly, this is an option, but when trying to build a strong ISA, I think there is a better option.
Any income received can be used to purchase more shares of the same. This means that even during a period of high volatility when share prices are falling, dividend money can be used to buy at a lower price, without having to add more cash to the ISA! Over time, this may provide a better combined average purchase price and act to smooth out swings in our share price.
An idea to think about
An example of an action worth considering is payment point (LSE:PAGO). He FTSE 250 The stock has a current dividend yield of 4.75%, and the share price is up a whopping 90% over the last year. Even with this, the P/E ratio is 12.75. Although it's above my fair value benchmark of 10, I wouldn't say it's close to overvalued.
It pays quarterly dividends, providing frequent opportunities to receive cash. Not only that, but I would also classify it as a defensive action. The company offers payment services and has a strong base in the UK for retail transactions. Regardless of the state of the economy, payments will continue to flow during good times and bad.
One risk is that net debt is increasing; the half-yearly report shows it rising to £86.8m. This was because more investments were made to drive growth, which is understandable, but you have to be careful.
Ultimately, I think it is a stock that investors could consider for inclusion to help build a strong ISA.
