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Like many people, I use a Stocks and Shares ISA to try and build wealth. I see that as a long-term project – I am a long-term investor, after all.
Still, if I could do it faster rather than slower while sticking to a risk level that suits me, I would be happy to do so.
Here are three ways in which an investor might aim to grow the value of their ISA more quickly.
Avoid high-yield traps (and low-yield ones!)
How attractive is a share that yields 10%?
It is impossible to answer that question without more information.
After all, no dividend is ever guaranteed to last. That is true even of a small payout, let alone a big one. As a general approach I regard high yields as a red flag that can suggest the City reckons (rightly or wrongly) that a company may not maintain its current dividend in future.
So when looking longingly at a juicy yield offered by a share, I think a savvy investor will ask themselves several questions.
One is how likely the yield is to last.
Another is what may happen to the share price over time. Owning a high-yield share can sometimes result in a loss if the share price drops dramatically.
That can also be true of low-yielding shares. So when considering dividend shares to buy for my ISA, I always look not only at the yield but also the source of that yield.
For example, I pore over a firm’s free cash flows and consider how well I think the business is likely to do in coming years and decades.
Make fewer, better investments
In the stock market, we often encounter a fair number of shares we reckon will do quite well – and a few about which we are highly confident.
The reality is that anything can happen. Nobody knows in advance what may happen to a particular share.
But what we do know is that a portfolio of fewer, higher-performing shares will build wealth faster than an ISA stuffed with more shares that turn out to be only mediocre performers.
Rather than investing in what I think are merely good ideas, therefore, I prefer to wait for what I think are the rarer, really strong investment ideas to come along.
Take Filtronic (LSE: FTC) as an example.
It is easy to point to some challenges for the investment case. The company’s valuation is currently not cheap. Its reliance on SpaceX as a key customer is significant: if that relationship goes south, Filtronic’s revenues and profits could suffer badly.
But that raises the question: why has SpaceX been such a prolific customer of Filtronic? I think the answer lies in the company’s deep sectoral expertise, ability to match customer needs and growth plans. Filtronic’s client roster, while lopsided, is impressive.
Besides SpaceX, other highly sophisticated clients are buying from it. I think its best days may lie ahead – and I continue to own its shares.
Minimizing unnecessary costs
Different ISA providers have their own charges. That makes sense: each investor has their own needs.
But what I think does not make sense for me as an investor is overpaying.
One simple way to improve overall ISA performance is to reduce the costs, by choosing the right Stocks and Shares ISA.
