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Investing £20,000 in a Stocks and Shares ISA for the first time can be a daunting process. It also doesn’t help that most ISA providers offer seemingly countless choices among asset classes and international financial markets.
Needless to say, things can get overwhelming fairly quickly. So let’s break down the process and explore the options that might be the most suitable for novice investors.
Stocks, bonds, or funds?
With interest rates no longer hovering near zero for the first time in a decade, bonds are once again attractive investments. They’re typically lower risk versus stocks, with many now offering high single-digit returns without venturing into junk-bond territory. And for investors with a lower tolerance for risk, it might be the more suitable choice.
However, stocks, while riskier, offer the potential for significantly higher returns. Unlike bonds, whose returns are ultimately determined by the coupon rate, stocks don’t have any limits to their return potential. And in some cases, this can lead to gargantuan returns in excess of 10,000% in the long run, as demonstrated by companies like Microsoft and Intuitive Surgical, among others.
Don’t forget shareholders are part-owners in the underlying business. So if the company flourishes, so do the investors. Of course, these five-figure returns are pretty rare. And for every Netflix, there are hundreds of Blockbusters.
Finding life-changing investments isn’t a straightforward process. And even if an investor ends up owning one of the best companies of the decade, there’s no real way of knowing until years later. Not to mention, there’s always the chance that shares may be sold off too early.
This is where funds come into the picture. While these investments come with fees, it leaves the job of finding terrific opportunities to professionals, allowing the investor to sit back and relax.
Spreading my cash
As someone who likes to get my hands dirty, funds aren’t really my cup of tea. And while bonds look far more alluring today versus a few years ago, stocks continue to be one the best asset classes throughout history. And who doesn’t love the idea of potentially turning £20,000 into £2m?
But as previously mentioned, stocks, like all investments, aren’t risk-free. And putting all my eggs in one basket exposes my net worth to some serious levels of risk. This is where diversification enters the picture.
By spreading my capital across multiple high-quality enterprises, the impact of one failing is mitigated by the success of the others. This also slightly increases the odds of stumbling upon another 100-bagger investment.
Regardless, there’s no substitute for being well-informed, emotionally disciplined, and prepared. And this applies irrespective of which investing style or approach an investor decides is best for them.
