Dreaming of ISA riches? 3 mistakes to avoid

As a long-term investor, I like the opportunity a Stocks and Shares ISA offers me to try and build wealth over the decades to come.

But, as ever in the stock market, there is no guarantee of success.

Here are three mistakes I am seeking to avoid as I invest my ISA.

Investing in companies you don’t understand

Is hydrogen power something that could grow more widespread in years to come? Yes.

Does Ceres Power have interesting battery technology for hydrogen? Yes.

So, should investors now consider Ceres Power?

I think that partly depends on whether they understand the company.

Some people have decided to invest in renewable energy companies just because they think the area is set for growth, but without really understanding the companies in which they are buying stock.

I think it is foolhardy to put money into a share you do not understand. It is basically a form of speculation, not investment.

Of course, we can always learn about new things. Someone who wants to buy shares in a certain area can learn more about it.

Diversifying — but not staying diversified

Spreading an ISA across a number of different shares is a simple but important way to reduce risk if one of them does badly.

But what if one of them does well – as in really, really well?

That might sound like cause for champagne corks to fly, rather than being much of a problem. But in fact it can be a challenge.

Why? Because a share that was initially just one among others in a diversified portfolio can come to dominate it thanks to its very strong performance.

This can be a difficult situation to face. If a share has done so brilliantly, it can seem counterintuitive to sell even part of the holding. However, I think it is important to keep an ISA balanced and diversified.

Ignoring the financial details of share-dealing

I hold a share called Logistics Development Group (LSE: LDG). It is basically an investment vehicle that holds stakes in a small number of private companies.

The managers have proved that they are able to create value. Nonetheless, the share sells at a considerable discount to its net asset value.

Some of the businesses in which the company has invested have strong potential, in my view, including a national logistics network.

LDG has some downsides: its portfolio is not very diversified. The financial information on its holdings is less detailed than would be the case if they were publicly traded companies, so it can be hard to make a detailed assessment of performance (though the net asset value is a helpful figure).

But there is a challenge for someone who wants to invest. As is usual, there is what is known as a spread between buying and selling price – but with a small company like LDG this is notably bigger than with a large company.

As soon as I buy the share, I already need it to go up just to be able to sell it for what I paid. On top of that are fees, commissions and all other costs that can come with a Stocks and Shares ISA.

This is just part of investing – but it can be a mistake to ignore the seemingly small financial details of such costs.

The post Dreaming of ISA riches? 3 mistakes to avoid appeared first on The Motley Fool UK.

More reading

• Bill Ackman just loaded up on this S&P 500 stock in his FTSE 100-listed fund
• Unilever shares go ex-dividend on 26 February – time to consider buying them?
• A £13,607 annual second income for £500 per month? Here’s how it can be done
• Why 26 February could be critical for Rolls-Royce shares
• An ISA with 500 Greggs shares could pay out £346 a year in passive income

C Ruane has positions in Logistics Development Group Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

See author's posts