Historically, the average Stocks and Shares ISA has returned 9.64% a year. That means a £20,000 investment generates an average annual return of £1,928.
That’s almost certainly more than you can get by keeping that sum in cash. So a Stocks and Shares is definitely worth considering for anyone with excess savings – with a few caveats…
Down years
An average return of 9.64% means Stocks and Shares ISAs tend to do better than cash over time. But there are periods when they do worse.
In 2022-23, for example, the average ISA lost around 3% of its value. At the same time, cash savings went up slightly in the way that they pretty much always do.
Nobody knows when the next down year for the stock market will be. But that doesn’t mean people should stay away from investing entirely – it means they should look to be strategic.
The best way to deal with stock market volatility is to avoid being in a position where you might have to sell when prices are low. And that means being careful with what you invest.
As a rule, nobody should look to invest cash they think they might need in the near future. In other words, only excess savings should be considered for a Stocks and Shares ISA.
This limits the risk of having to pull money out when prices are low. And from there, it’s about finding the right investing strategy.
Diversification
One rule that virtually everyone agrees on in the stock market is that it’s important to build a diversified portfolio. In other words, owning assets in a variety of industries and geographies.
In this spirit, one idea I have for investors getting started with a Stocks and Shares ISA to consider is Porvair (LSE:PRV). It’s not a household name, but it’s well worth a look.
Porvair manufactures and sells filtration equipment into the aerospace and life science industries. In other words, it’s one company, but it makes products for different end markets.
Both of these are cyclical, which means demand can wax and wane and this can create a risk. But being exposed to both of these helps make the business more resilient and stable overall.
Covid-19 is a great example of this. During the pandemic, demand for lab equipment was very strong while travel restrictions meant aerospace went through a major downturn.
Afterwards, though, air travel resumed and demand recovered, but high inventory levels in labs caused sales to this market to slow. This is the benefit of diversification in action.
Risks and rewards
I think anyone looking to get a better return on their excess cash should definitely consider a Stocks and Shares ISA. While returns aren’t guaranteed, previous results have been strong.
Even for long-term investors, diversification is important. That helps reduce the effect of the inevitable pressures that all industries face from time to time on an overall portfolio.
Porvair’s recent record is a good example of this in action. While it’s not enough to diversify a portfolio by itself, I think it could be a good place to consider starting.
