How I’d invest this year’s Stocks and Shares ISA to build long-term wealth

With the new tax year, I now have a new Stocks and Shares ISA contribution limit. What should I do?

I can aim for short-term income, or pick a few companies that I think can grow in the next year or two. But as a long-term investor, what I recommend is using an ISA to try and build long-term wealth.

Below are four principles that I will use when trying to achieve these goals.

Always diversify

Diversification is a simple but important risk management tool. It doesn’t matter how good my prospects for business are, if I put too much stock and shares into the ISA and it turns out to be different to my expectations, that can be a costly mistake.

With a £20,000 ISA allowance, diversification should be possible. If I use my full allowance in the coming year, for example, I can spread the funds across five to 10 different stocks.

Focus on proven business models

One of the issues I have with my investment strategy is investing in income or growth stocks.

Growth shares come in all shapes and sizes. Some fast-growing businesses have proven business models that are already profitable. But others don’t.

Renewable energy is a good example. I expect some companies in the sector to be profitable in the near future – possibly big. But now, the company is happy ITM power and AFC Energy they are lossmaking.

Is it just a pain, or a sign that they don’t have a successful business model? I don’t know, which helps explain why I don’t own the stock.

In the Stocks and Shares ISA this year I plan to focus on buying into companies with a proven business model. Past performance isn’t always a guide to what will happen in the future, but usually companies with unproven business models are too speculative for my taste.

Compounding dividends

How can I turn £20,000 invested in an ISA this year into £200,000 even though the shares I bought didn’t go up in price?

One way is to invest money in stocks that compound at 7% per year for 35 years.

Dividend yields may change over time. But I think consolidating the dividends I receive into an ISA can be a powerful way to help me build long-term wealth.

Avoid unnecessary risks

All stocks carry some level of risk. Some, however, are clearly riskier than others.

Some investors’ argument for owning these stocks is ‘high risk, high reward’. By investing in risky stocks, they hope to do well if the stock performs strongly. That sometimes happens.

But in the long run, some risky stocks can lead to bad results. I want to invest to make money, not lose it!

So this year, when investing in Stocks and Shares ISA, I will try to make my shares look even Moderately risky. Instead of trying to maximize returns, I will focus on reducing risk – and hope that some well-chosen shares can do well for me over the long term.