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I firmly believe that the Stocks and Shares ISA is a fantastic way to grow your wealth. By making regular contributions to the £20,000 annual allowance, investors can maximise their tax-free returns. My approach is to invest consistently, but if I had a windfall of £20,000 today, this is how I would allocate it.
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, and does not constitute, any form of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decision.
Building a diversified portfolio
The first step is to decide how many shares to include in my ISA. While there is no definitive answer, a number of successful investors have portfolios highly concentrated in individual stocks. Billionaire investor Warren Buffet has historically allocated around 40% of his portfolio to individual stocks such as American Express and Apple.
However, for most of us just starting out, it makes sense to take a more gradual approach. I believe that a balanced portfolio of 20 to 25 stocks diversified between fixed-income and growth stocks provides a solid foundation.
Risk reduction
To reduce risk, I wouldn't invest all £20,000 in one go. Spreading investments over the year with monthly contributions is a more strategic approach. This reduces the chance of investing it all just before a market crash.
Drip investing is a strategy that some investors use for this reason. It simply means shelling out a small, fixed amount every month (or week), regardless of how the market performs. In the past, I have tried waiting for the market to dip and it never materialized. In the end, I ended up buying at a higher price.
Trying to accurately time the market is therefore a task reserved for very experienced investors.
A solid starting point
A possible investment to consider is Barclays (LSE: BARC). This FTSE 100 Index The banking giant is currently my top-performing stock, up 57% over the past 12 months. And after such a long period of growth, you'd expect the stock to be overbought. However, it's still trading at 62% below its fair value, based on future cash flow estimates.
As a smaller British bank, it is often overshadowed by Lloyds and HSBC Bank But I think it offers better prospects. For example, its price-to-earnings (PEG) growth ratio is 0.7. Any number below one indicates that earnings are growing faster than the price, so the stock represents good value. Lloyds' PEG is 1.5 times earnings, meaning the price is a bit high compared to its earnings growth.
For now, the economy is doing well, which is helping Barclays grow, but if it falls back into a recession like the one in 2008, banks could be the hardest hit. That is my biggest concern for stocks.
Buybacks vs dividends
On 1 August, the bank announced plans for a new £750m share buyback programme. This follows the completion of an earlier £1bn share buyback initiative announced in its 2023 annual results. The latest plan forms part of an initiative to return £10bn in capital to shareholders between 2024 and 2026. The aim is to achieve this target through a combination of buybacks and dividends.
Unfortunately, Barclays can't compare to HSBC when it comes to dividends. With a yield of just 3.6%, it's half that of the UK's largest bank. This is probably due to its strategy of devoting more profits to share buybacks than dividends.
It's a trade-off that could risk deterring dividend-focused investors.
As mentioned above, diversification is key. That's why I also own some HSBC stocks along with other high dividend payers like Legal and general.