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You know what’s the biggest worry I hear from people thinking of starting a Stocks and Shares ISA? It’s that buying shares is too risky. I’ve heard people recently saying things like, “Investing in the stock market isn’t so clever now, is it?“
They see what’s happening in the US, what tariff wars have been doing. They look at the slumps in high-flying companies like Tesla and Apple, and the knock-on effect on the FTSE 100. And it confirms their worst fears, that we could lose our shirt gambling on the stock market.
I wonder how many have been put off taking up the new 2025/26 ISA allowance because of April’s turmoil? Quite a few, I expect. It could be the biggest financial mistake of their lives.
Scary losses
I don’t want to underplay the risk, because it is real. But it’s manageable. And the longer we plan to invest, the lower and lower the risk can become.
Picture someone who bought Tesla as their first investment at $488 in December 2024. Today they’d already be sitting on a loss of around 40%. Even the most optimistic of stock market bulls can’t claim that’s not going to hurt.
Whatever happens to Tesla next (and I still see long-term potential), an early experience like that can put an investor off shares for life. So how can we manage the risk, and minimise our chances of early pain?
It’s all about diversification, and there’s one straightforward way to go about it. We could make something like the iShares Core FTSE 100 ETF our first investment. It’s an exchange-traded fund that spreads the cash across the whole FTSE 100. One stock has a shock and crashes? No worries, we have another 99 to keep us up.
Investment trusts
I prefer a sightly more refined approach myself, and that’s to use investment trusts with specific strategies. City of London Investment Trust (LSE: CTY), which targets dividends from UK shares, is my top choice.
The trust has raised its dividend for 58 years in a row, currently with a forecast 4.6% yield. That’s a big attraction, though at the same time makes for a bit of risk. If it isn’t raised one year it won’t bother me much, but it could knock the share price back a bit. Maybe I’ll buy more if that happens.
The key attraction for me is the mix of individual stocks my money is spread over. HSBC Holdings, BAE Systems, Lloyds Banking Group, AstraZeneca… they’re in the top 10.
Great start
We don’t get as much diversification as with a full index tracker. And an investment trust can still fall in a general stock market slump, just as a tracker can. But I do think a tracker or a small selection of investment trusts could make the lowest-risk start for a new Stocks and Shares ISA investor.
We just need to remember not to make the big mistake of thinking a stock market fall means it’s time to sell, or avoid. It’s surely time to buy, when stocks are cheaper, right?
