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I think putting money into a stocks and shares ISA to invest in great businesses over the long term can potentially help build wealth. That's why I do it.
However, along the way, here are some common ISA mistakes I try to avoid.
1. Spending too much on fees and commissions
The first is obvious, but still a potentially costly mistake.
Fees and commissions can affect the value of a stocks and shares ISA (in the long term, perhaps severely).
Therefore, I continually take the time to check whether I am using the stocks and Shares ISA that best suits my own needs.
2. Trade, not invest
I mentioned the long term above.
This is because I don't intend to trade buying and selling stocks frequently (probably accruing commissions each time).
Rather, my goal is to buy what I believe are great companies that I would like to hold for a while.
3. Not distributing my investments enough
Why did Warren Buffett sell many of his Apple (NASDAQ:AAPL) recently?
Whatever the reason, one benefit is better diversification.
It's easy to fall in love with an investment idea. It can also happen that a great idea leads to a skyrocketing share price, so that a stock's role in a portfolio increases over time – exactly what happened with Buffett's stake in Apple.
Either way, not staying diversified can be a costly mistake. With an annual stocks and Shares ISA allowance of £20,000, I think it's easy to stay diversified.
4. Buy the business case, not the action
At its current price, I think Apple also illustrates another potentially costly investment mistake.
Is Apple a big business? I think it is. The market for the type of products and services you sell is huge and I think it could grow over time.
Within that market, Apple has a unique position that can help it make huge profits, as it has consistently done in recent years. From its brand to its patents to its customer base to its distribution network, Apple has a strong “pit“, as Buffett calls the competitive advantage of a company.
But is Apple a good stock to buy today? I don't believe it.
Simply put, I think its P/E ratio of 39 means it is overvalued.
As an investor, like Buffett, I don't just look to buy big businesses. I also want to buy those shares at attractive prices.
5. Not reviewing developments along the way.
But if doing too much can be a mistake, so can doing too little.
Once again, I think Buffett's decision regarding Apple is instructive on this point. He is not a trader, as he has held some of his stocks for decades.
But he doesn't have his head in the sand either. A great investment idea may become less attractive due to changes in the company's prospects, its stock valuation, or both.
So while I don't continue to tinker with my stocks and Shares ISA, that doesn't mean I buy shares and then ignore them for decades.
