Every year when the annual contribution deadline for a Stocks and Shares ISA comes up, many people think about putting money in and wonder what it might end up being worth if they did.
Thoughts are not actions however. So what have those dreamers who did not follow through with their idea miss?
Long-term investing can be powerful
To illustrate, let me use a five-year timeframe. The stock market can have ups and downs, so taking a long-term approach to investing makes sense, in my view.
What would an ISA that was set up five years ago with £20k be worth now? The answer depends on what was done with it. Some people use their ISA to track an index, while some use it to build a portfolio of individual shares.
One other factor that would have affected return, whatever investing strategy was adopted over the past five years, would be fees and charges levied by the ISA provider. That helps explain why it pays to shop around when choosing what Stocks and Shares ISA to use.
Active or passive? This approach or that one?
Investing in an index (typically by buying shares that track it) is one approach, commonly referred to as passive investing.
Choosing individual shares is known as active investing. But both passive and active investing can involve multiple options.
For example, if tracking the index, what index to choose? Over the past five years, the FTSE 100 is up 51%, meaning a £20k ISA would now be worth over £30k. But the FTSE 250 is up by a more modest 6%, so the £20k now ought to be worth a little over £21k.
An ISA could be used to invest in trackers in other markets too. The US S&P 500 index has grown 75% in five years, turning a £20k ISA into a £35k one, before considering the impact of exchange rates.
Meanwhile, there may well have been dividends along the way – some trackers pay them, some do not.
The FTSE 250 yields 3.5%. That is above the FTSE 100’s 3% and well above the 1.1% yield on offer from the S&P 500 at the moment.
Buying a variety of individual shares
An alternative that could have done better or worse, depending on what shares were bought, is buying individual shares. Diversification is important and £20k is ample for that.
One share in my Stocks and Shares ISA I believe has strong potential to consider is polymer maker Victrex (LSE: VCT). Its share price has dropped 73% in five years but the dividend per share has been flat. The yield is therefore now a very attractive 8.3%.
Lately, that yield has not been covered by earnings, so it could well be cut.
The challenge for earnings – and the Victrex share price – has been a slowdown in demand from more lucrative end markets like medical.
An expensive factory rollout in China is another risk – it still does not seem to be contributing anything like what investors originally hoped to company performance.
But, although there are risks, I see Victrex shares as undervalued. Its sales have been growing strongly lately. It has focused on managing costs. Meanwhile, its proprietary polymers give it pricing power.
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Christopher Ruane owns shares in Victrex.
