With £1,000, I’d go for this investment held in a Stocks and Shares ISA

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A Stocks and Shares ISA frees my investments from tax. There’s no capital gains tax to pay if my stock holdings go up. There’s no tax on shareholder dividends. And there’s no income tax when I draw money out of my ISA.

I can pay as much as £20,000 each year into my ISA as the current rules stand. But it’s okay to pay in less than that. And I tend to put as much as possible in my ISA account every time the allowance renews on 6 April each year.

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Investing in British companies

But opening a Stocks and Shares ISA and putting some cash in it is just the start. The important part is selecting stocks and shares to hold within it. And with £1,000, I’d approach the question of where to invest differently depending on whether the £1k was my first sum, or a follow-on investment.

If it was my first investment, I’d choose a low-cost index tracker fund that follows the FTSE 100 index. And no matter how diversified my portfolio becomes, I’ll probably always have a portion of my money invested in the Footsie.

And I’d choose a tracker investment that accumulates the dividends and automatically rolls them back in. That’s because reinvesting dividends is one of the best ways to ensure I’m on the road to compounding my investments over time.

The FTSE 100 is attractive to me right now. It contains many cyclical companies, such as oilers BP and Shell, miners Rio Tinto and BHP, bankers Lloyds and Barclays and retailers Next and Asos. And because their profits and share prices tend to cycle up and down, they tend to help the Footsie bounce back from its lows.

So there’s a potential opportunity to optimise a Footsie investment by adding regular money to it. I’d add every month. And when and if the index dips in the future, I’d keep adding because those investments near the lows could do well if the index rebounds later.

Targeting growth

But cyclicals aren’t the only constituents in the index. There are some decent defensives and faster-growing outfits as well. I’m thinking of names such as pharmaceutical company AstraZeneca, consumer products king Unilever, premium drinks supplier Diageo and information and analytics specialist Relx.

The FTSE 100 started in January 1984 and it had a base level of 1,000. So we can get an idea of the long-term growth potential by comparing that figure to today’s level near 7,200. Although past performance is no reliable guide to the future.

However, many foreign investors are currently making noises about British companies looking like they have low valuations. So there could be a short-term influx of money to provide impetus to the Footsie.

If my £1,000 ISA investment was a follow-on investment, I’d likely aim to put all the money in the shares of one individual British company with the aim of enhancing my portfolio’s growth potential. But I’d research thoroughly before buying. And although positive outcomes are not guaranteed, I’d aim to invest subsequent amounts of money in other stocks to build diversification.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays, Diageo, Lloyds Banking Group, RELX, and Unilever. 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.