I believe putting money in a Stocks and Shares ISA to invest in great businesses over the long term can potentially help to build wealth. That is why I do it.
Along the way, though, here are a handful of common ISA mistakes I aim to avoid.
1. Spending too much on fees and commissions
The first is an obvious one but still potentially a costly error.
Fees and commissions can eat into the value of a Stocks and Shares ISA – over the long term, perhaps badly.
So I take time on an ongoing basis to check whether I am using the Stocks and Shares ISA that best suits my own needs.
2. Trading not investing
I mentioned the long term above.
That is because I do not aim to trade by buying and selling shares frequently (likely racking up commissions each time).
Rather, I aim to buy what I think are great companies I would like to hold for a while.
3. Not spreading my investments enough
Why did Warren Buffett sell a lot of his Apple (NASDAQ: AAPL) stake recently?
Whatever the reason, one benefit is improved diversification.
It is easy to fall in love with an investment idea. It can also happen that a great idea leads to a soaring share price, so the role of one share in a portfolio balloons over time – exactly what happened with Buffett’s Apple stake.
Either way, not staying diversified can be a costly mistake. With an annual Stocks and Shares ISA allowance of £20k, I think it is simple to keep diversified.
4. Buying the business case, not the share
At its current price, I think Apple also illustrates another potentially costly investing mistake.
Is Apple a great business? I think it is. The market for the sorts of products and services it sells is huge and I think it could grow over time.
Within that market, Apple has a unique position that can help it make massive profits, as it has done consistently in recent years. From its brand to patents and customer base to distribution network, Apple has a strong “moat“, as Buffett calls a company’s competitive advantage.
But, is Apple a great share for me to buy today? I do not think so.
In a nutshell, I think its price-to-earnings ratio of 39 means it is overvalued.
As an investor, like Buffett, I am not only seeking to buy into great businesses. I also want to buy such 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.
Again, I think Buffett’s move on Apple is instructive here. He is not a trader, having held some of the shares he owns for decades.
But equally, he does not have his head in the sand. A great investment idea can become less attractive because of changes in the company’s outlook, its share valuation, or both.
So, although I do not keep tinkering with my Stocks and Shares ISA, that does not mean that I buy shares then ignore them for decades.
The post 5 Stocks and Shares ISA mistakes to avoid appeared first on The Motley Fool UK.
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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
