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Not everyone sees things the same way, and this is also true when it comes to stocks and shares ISAs, but mindset is important when it comes to investing.
How we think about things and what we do as a result can make the difference between creating wealth or losing it.
Below are three different ways I've heard people talk about an ISA. I prefer one of the three and will explain why.
Saving money without expectations
Some people set aside some money in a stocks and shares ISA and then use it to make occasional investments in companies they may not even understand, but which they hope will give them incredible returns. Part of the thought process here may be that it doesn't matter if a lot of the shares don't perform at all, as long as one is performing brilliantly.
Sometimes that could work, if you had invested in Cinderella (LSE:AHT) 15 years ago, you would now be making a return of over 7000% from the share price gain alone, even before considering dividend income.
But this approach seems to me to be speculative, not investment. If I am investing my hard-earned money into an ISA, I prefer the second method. That is, I want to invest in companies that I understand and have a basis for my choice.
Hoping to match the market
To be fair, that's how a lot of people think. They don't want to invest money in a bunch of random companies and basically see if they get lucky.
But the stock market can be a confusing place. Analyzing companies takes time, and many people have more pressing matters to attend to.
Therefore, some investors simply hope to be able to invest in an ISA with a return that matches that of the market. Therefore, a common approach (method three) is to buy an index that mirrors the performance of a common market index, such as the FTSE 100 Index.
I consider it an investment, not a speculation. One of my concerns would be to choose a tracker that minimizes the amount I have to pay in fees.
Looking to build serious wealth
Still, as a long-term investor, I'm not overly enthusiastic about the approach. Why? Basically, I think it's a missed opportunity. I mean, even over the past five years, Ashtead's share price is up 124%.
During that period, the FTSE100 rose by just 12% (and the FTSE 250 Index by a meager 2%). In other words, the price gains in the index would not even have kept the value of my ISA the same in real terms after inflation.
Dividends would have helped me, but the second method, using my ISA to buy carefully selected shares, could have helped me generate more wealth than a tracker.
Ashtead's low price in the past reflected risks, such as a recession-induced slowdown in the construction sector leading to lower demand for rental equipment. In my view, that risk is now coming back into play.
But it has the elements of a big business, just as it had 15 years ago. Market demand is high, customers have big budgets for the equipment they need and there is little competition.
Valuation is important. The uncertain economic outlook and the potential impact on construction discourage me from adding Ashtead to my ISA at this time. That's why I'm looking for other excellent shares at attractive prices to add to my ISA.
