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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.
