The Stocks and Shares ISA is the bedrock of tax-efficient investing in the UK. However, few people learn how to maximise its potential.
Looking to up your game in 2026 and build a high-performing portfolio with potential to beat the market? Here’s how to use an ISA like a pro.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
What the pros do differently
Professional investors don’t always generate prolific returns. However, in general, they outperform retail investors (studies by DALBAR have shown that some retail investors can achieve underwhelming returns).
Why do the pros tend to do better than private investors? Well, one reason is that they manage risk carefully and focus on not losing money.
Professionals are typically in charge of managing other people’s capital, so it’s crucial that they don’t rack up large losses. Nobody wants to sit down with a client and tell them that their retirement portfolio has tanked! They could also lose their job if their investment performance is poor so risk management counts.
In managing risk, there are a few different strategies they use. One is diversification (spreading capital over many different stocks/areas of the market).
It’s rare to see a professional investor with less than 20 stocks in a portfolio. Many prefer to own 40 to 60.
By owning 20+ stocks, an investor can reduce their stock-specific risk significantly. And by owning stocks from different areas of the market (US stocks, small-cap stocks, etc), risk can be reduced further.
Careful portfolio construction
Another important strategy is position sizing. This risk management tool doesn’t get talked about enough and a lot of retail investors have no idea about it.
What it involves is thinking about a stock’s size in the overall portfolio, given its risk/return profile. To reduce risk, higher-risk stocks (like Palantir) are given much smaller positions than more stable blue-chips (like Amazon).
By giving a high-risk stock a small position in the portfolio, say 2%, the investor can still potentially capture great returns if it surges. However, if it tanks, the most they can lose is 2%.
Where retail investors often get it wrong is that they’ll have a large proportion of their portfolio, say 30%, in a high-risk stock. That then crashes and their portfolio tanks.
Pros like quality
Finally, professional investors tend to focus on high-quality companies and these often turn out to be good investments. I’m talking about companies that are growing, are highly profitable, and have strong balance sheets.
For example, one that’s quite popular with professional investors in the UK is Sage (LSE: SGE). It’s a British software company that provides accounting and HR solutions.
It has a great growth track record. And looking ahead it should continue to grow as firms digitalise their back office operations.
Meanwhile, it’s very profitable. Last financial year, for example, return on capital employed (ROCE) was about 23%.
It also has a great balance sheet, a healthy dividend (around 2.2%), and share buybacks. So, overall, it has tons of quality.
Is this stock worth a look today? I think so – the valuation is quite attractive at present.
There are some risks around disruption from AI. But I like the risk-reward proposition at current prices and see it as worth considering.
