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A Stocks and Shares ISA can deliver tremendous results over the long term. With regular contributions and a robust investment strategy, itâs possible to build up a six- or seven-figure account over time.
Thereâs one key mistake that a lot of investors make with these accounts however. This mistake can set them back significantly, and prevent them from achieving their financial goals.
Portfolio management 101
Itâs no secret that avoiding big losses is important when it comes to building up a large ISA portfolio. If a stock you own falls by 50% or more, it can really hurt your progress (you need to generate a 100% gain just to breakeven on a stock that falls 50%).
Now, most investors use diversification (spreading capital out over many different stocks) as a risk management strategy. And thatâs smart. But thereâs another portfolio management tool that can be even more effective. And thatâs âright sizingâ positions. In my view, this is the secret to investing success. Ignoring it is a mistake.
How to size portfolio positons
When it comes to sizing portfolio positions correctly, there are no set rules. Generally speaking though, the idea is to balance risk and reward. Ideally, your largest holdings should be reliable blue-chip stocks that are unlikely to tank and result in permanent loss of capital (but still offer the potential for solid returns). More speculative stocks â where thereâs risk of major losses â should be smaller holdings.
By constructing a portfolio this way, an investor can give themselves a much better chance of success. Done properly, thereâs far less chance of ugly losses.
Even if a few more speculative holdings blow up, it wonât be the end of the world. Because the large blue-chip holdings should offer protection.
How this strategy has saved me
To illustrate how this works in reality, hereâs a look at how it has helped me in recent years. Iâve had my fair share of portfolio losses â stocks Iâve owned that have tanked include JD Sports Fashion, Kainos, and Zscaler.
These were all small positions for me though. So losses were manageable.
Importantly, gains from my larger, blue-chip holdings have offset the losses. For example, my gains on Amazon (NASDAQ: AMZN) stock â my largest holding â have more than made up for the losses on those other names.
So allocating more capital to rock-solid companies has paid off. By right-sizing my positions, Iâve protected myself from losses.
A blue-chip stock to consider today?
Why is Amazon my largest holding? A few reasons. For a start, itâs a well-established company that operates in a number of industries including e-commerce, cloud computing, chips, streaming, and space. So itâs unlikely to see its revenues suddenly plummet.
Second, itâs strong financially. This is a company that generates a ton of cash flow and has a rock-solid balance sheet.
Third, it still has a lot of growth potential, despite the fact that it sports a market-cap of $2.8trn today. Looking ahead, chips and space could be huge growth drivers.
Of course, there are no guarantees that it will be a good investment for me from here. If we were to see a major global economic contraction, business performance could be compromised.
Taking a five-year view though, I see a lot of potential. In my view, this stock’s worth a closer look.
The post 1 major investing mistake that can drain your Stocks and Shares ISA appeared first on The Motley Fool UK.
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Edward Sheldon has positions in Amazon and Zscaler. The Motley Fool UK has recommended Amazon, Kainos Group Plc, and Zscaler. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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