Simple truths about starting an ISA

Not knowing how to start is arguably one of the most common reasons Britons don’t have Stocks and Shares ISAs. It can be daunting, with a range of brokerages offering ISAs with varying trading fees and reported benefits.

And then there’s that first investment. It can be incredibly challenging to know where to put one’s hard-earned cash. Investors who elect to invest in individual companies first may experience more volatility than they were hoping for.

However, starting with a diversified approach — investing in tracker funds or even investment trusts — can mitigate some of that volatility. In turn, this can create a more reliable base from which investors can start to look at individual stocks.

One of the easiest ways to get disheartened and stop investing is to make mistakes and lose money. Some of my first investments, many years ago, were simply companies I liked. These were not the undervalued stocks that have since taken my portfolio forwards.

But once a new investor understands that making poor decisions can result in losing money, and takes steps to preserve capital by making informed decisions, the path to wealth generation becomes simpler.

What are tracker funds?

Tracker funds, also known as index funds, are investment vehicles designed to mirror the performance of a specific market index, such as the FTSE 100 or S&P 500. They achieve this by holding a portfolio of securities (stocks, bonds, etc.) that closely matches the composition of the chosen index. This allows investors to gain exposure to a broad range of companies at a relatively low cost. 

Tracker funds are passively managed, meaning they do not attempt to outperform the market. Instead they aim to replicate its returns. This typically keeps fees low. Among tracker funds, global trackers stand out because they invest across multiple countries and sectors. This makes them some of the most diversified investments available.

Or something a little more exciting

Scottish Mortgage Investment Trust (LSE:SMT) is a well-known, actively managed fund that focuses on finding and supporting some of the world’s most innovative and high-growth companies, both public and private.

Managed by Baillie Gifford, the trust invests in sectors like technology, healthcare, and transportation, with holdings including giants such as Nvidia, Amazon, and SpaceX. 

Over the past decade, Scottish Mortgage has significantly outperformed the FTSE All-World benchmark, delivering a net asset value total return of 343% compared to the benchmark’s 186%. 

Unlike tracker funds, Scottish Mortgage’s concentrated portfolio and focus on disruptive businesses can make it more exciting for investors. However, this approach also brings higher risk and volatility, and the trust’s share price can trade at a premium or discount to its underlying assets.

I use this investment trusts as a core part of my SIPP, my daughter’s SIPP, and it’s in our ISAs. I certainly believe it’s worth considering.