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stocks and shares ISAs are extremely flexible investment vehicles. UK residents can invest up to £20,000 a year tax-free in a wide range of assets, including funds, shares and commodities.
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.
The trick is knowing which assets to choose, as there are many options. With that in mind, here's how I would allocate my £20,000 annual allocation to target long-term wealth.
Striking a balance between risk and reward
I often find myself torn between investing in a safe, stable asset with minimal growth potential or a high-risk, high-growth asset. On the one hand, the profitability is low, but I can sleep peacefully at night. On the other hand, I'm anxious, but I could make big profits.
The solution? Do a little of both.
One investment strategy I like is called “core-satellite” investing. It involves investing a lot of money in stable options and setting aside a little more for riskier assets. Stable options typically include funds such as ETFs, mutual funds, or global equity funds. These managed funds spread the investment across a wide range of assets, reducing risk through diversification. They rarely return more than 5% annually on average, but have a very low risk of collapsing completely.
On the other hand, there are individual stocks in high-growth industries like technology and energy. These investments can sometimes return up to 20% or more in a single year, but are at greater risk due to environmental, economic and geopolitical factors.
Central investment
An example would be the iShares S&P 500 ETF (LSE:IEE.USA). Provides exposure to big-name US stocks such as microsoft, Apple, NVIDIA, and amazon. Fund manager Black Rock Carefully allocate the investment between stocks in the S&P 500 index, one of the best performing indices in the US.
Over the past 10 years, the iShares S&P 500 ETF has generated annualized returns of 12.48%, slightly above its benchmark S&P 500 index. Only once in 2014 did it underperform the S&P 500 average. However, Since it focuses on a single index in the US, it is prone to any economic risks facing the country. The S&P 500 is also heavily tilted toward technology, leaving it more exposed to risks in this specific industry.
Satellite investment
Take facebook's parent company as an example. Goal (NASDAQ: META), for example. This mega-cap US stock is up 631% over the past 10 years, generating an annualized return of 22%. So while this stock is also part of the iShares S&P 500, any money I had invested directly in it would have given me almost double the returns. However, if Meta failed, all that money would be gone. However, my main investment would only take a small hit.
Meta currently has a fairly high price-to-earnings (P/E) ratio of 25, slightly above the industry average but on par with similar large tech companies. Having risen 63% last year (almost triple that of the US market), it may struggle to gain more from here. CEO Mark Zuckerberg recently invested heavily in ai, a highly speculative bet that could pay off, or crash and burn. I think it will work well for the company, but only time will tell.
That's why it's important to always diversify! I like to keep about 60% of my portfolio in funds and 40% in individual stocks.
