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My Stocks and Shares ISA’s doing well these days. But it hasn’t always been this way. When I was a less experienced investor, I made a few mistakes that cost me money and set me back on my wealth-building journey.
Loading up on penny stocks
One was loading my ISA with speculative penny stocks in the hope of building wealth faster. This backfired spectacularly.
Penny stocks can play a role in a diversified portfolio. But investors have to approach this area of the market with caution.
Often, these stocks have minimal profits. As a result, their share prices can be very volatile. I learnt the hard way. Some penny stocks I owned lost most of their value, which wasn’t good for my ISA balance.
Piling into cheap high-yielders
Given that penny stocks weren’t working for me, I changed my strategy and focused on well-established companies with low valuations and high dividend yields. This didn’t deliver good results either.
Often, these cheap stocks would just get cheaper because the underlying businesses had fundamental problems and weren’t growing, meaning that share price losses would offset gains from dividends. And in a few cases, dividends were slashed, meaning I received less income than anticipated.
The lack of results here taught me a great lesson – never buy a stock just because it’s cheap or has a high dividend yield. Ultimately, it’s crucial to think about a company’s future prospects when investing in individual businesses.
Not diversifying my portfolio
One other mistake I made was not diversifying enough. When I was younger, there were times when I only owned a handful of stocks. This hurt my performance. If you only own five stocks and one crashes 80%, the chances are that your overall returns are not going to be great.
Lack of geographic diversification also had a negative impact on my returns. If I’d taken a more global approach and allocated capital to international shares, I could have achieved better returns.
How I invest today
The good news is that I’ve refined my strategy as a result of these mistakes and I’m now enjoying decent returns. Today, I own a diversified portfolio of high-quality stocks that have attractive fundamentals and my ISA balance is growing steadily.
One example of a stock that has done well for me is InterContinental Hotels Group (LSE: IHG) which owns many well-known brands including InterContinental, Holiday Inn, and Kimpton.
I first bought it in September 2023 when it was trading at 6,019p. Since then, it has risen to 9,856p – a gain of 61%.
Why did I invest in this company? A few reasons. For a start, it has a competitive advantage due to its strong brands (people tend to prefer staying at branded hotels).
Secondly, it’s well placed for growth in a world where people (including cashed-up retirees) want to travel. Third, it has a very profitable franchise business model. Finally, it’s a global company so it isn’t dependent on the UK economy.
Of course, there are no guarantees that the shares will continue to perform well. If consumers run out of cash and stop travelling, the shares could underperform.
Taking a long-term view however, I’m bullish. I plan to buy more shares on pullbacks when the valuation is a tad lower than it is today.
