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Putting money into a Stocks and Shares ISA can lay the foundation for building long-term wealth. But it does not always work out that way.
Here are three potentially costly mistakes to try and avoid when weighing how to invest in an ISA!
Give value traps a wide berth
When a share has got a lot cheaper and looks almost too good to be true, sometimes it is. That is exactly the mistake I made when buying some boohoo (LSE: DEBS) shares for my ISA a few years ago. The company had been making tidy profits, had a large customer base and owned some well-known digital retail platforms.
But the share price had tumbled. I saw that as a buying opportunity. However, I would have a bigger ISA today if I had taken more time to ask myself why the price had been falling steeply. Did other investors see something I did not?
Yes they did. In fact, perhaps multiple things. The impact of low-cost rivals like Shein and Temu was a risk I had not fully considered when adding boohoo to my ISA.
The company’s US expansion was another thing I got wrong. I saw it as a chance to scale the business model. But, like many British retailers before it, expanding Stateside was a costly misadventure for boohoo.
I sold my boohoo shares at a steep loss and they have continued to lose value since, although a turnaround could see them rising again.
Value traps are traps precisely because they look attractive. But often that is based on paying too much attention to a company’s past performance — and not enough to how its marketplace is evolving.
Too much of a bad thing
Although selling my boohoo shares was painful, it did not sink my ISA. Fortunately for me, it was only one of the shares I owned. In fact, I always make a point to keep my ISA diversified.
Even smart investors can make the mistake of not diversifying their ISA enough. Sometimes, one share seems so compelling it can be tempting to put aside normal rules and keep buying.
Another way to fall into this trap is simply by doing nothing. A share that is only 5% or 10% of an ISA’s value might soar so much that it ends up representing 50%, 60% or even more of the ISA.
The problem is that, no matter how brilliant a company is, it can always run into unexpected problems. That is why diversification always matters.
Throwing away money needlessly on fees
Another mistake some investors make when it comes to their ISA is paying more fees and higher commission than they need to. That is not just about finding the right ISA in the beginning. Fees and commissions can creep up over time, changing the attractiveness of a given ISA provider.
So I think a savvy investor will check from time to time whether they are still using the right Stocks and Shares ISA for their individual needs.
