3 different ways to think about ISA

Not everyone sees things the same way – and that's certainly true when it comes to a Stocks and Shares ISA. But mindset is important in investing.

How we think about things and what we do about them can make the difference between building wealth and losing it.

Here are three different ways I've heard people talk about ISA. I choose one of the three and I will explain why.

Putting money aside without expectations

Some people put some money into a Stocks and Shares ISA and use it to invest from time to time in companies they may not understand at all but which hopefully can give them amazing returns. Part of the thinking process here would be that it doesn't matter if most stocks do nothing, as long as one does very well.

Sometimes that would work – if I had invested Ashtead (LSE: AHT) Over the last 15 years, I would now be sitting on a return of over 7,000% from share price gains alone, even before factoring in dividend income.

But this approach seems to me like speculation and not investment. When I put my hard-earned money into an ISA, I choose the second option. That is, I want to invest in companies that I understand and have a basis for my choices.

I hope to match the market

In fairness, that's how most people think. They don't want to throw money at a bunch of random companies and actually see that they get lucky.

But the stock market can be a confusing place. It takes time to analyze companies and many people have more pressing demands on their time.

So some investors simply hope that they can invest in an ISA with market-like performance. The most common way (the third way) is to buy an index tracker that is similar to the performance of a common market index such as FTSE 100.

I see that as an investment, not a speculation. One of my concerns is choosing a tracker that minimizes how much I have to pay in fees.

Looking to build serious wealth

However, as a long-term investor this approach does not appeal to me very much. Why? Actually, I think it's a missed opportunity. Even in the last five years, the value of Ashtead has increased by 124%.

During that time the FTSE100 rose by only 12% (and i FTSE 250 with 2% less. In other words, the price gains on the index would not have kept my ISA value the same in real terms after inflation.

Assignments would have helped. But the second way, using my ISA to buy carefully selected shares would have helped me build more wealth than a tracker.

Ashtead's low prices have previously signaled risks, such as recession-induced slumps in construction leading to low demand for rental equipment. That danger has reared its head again now, in my opinion.

But it has the characteristics of a big business, as it did 15 years ago. Market demand is high, customers have deep budgets for the equipment they need and there is limited competition.

Balance is important. The uncertain economic outlook and the potential impact on construction is holding me back from adding Ashtead to my ISA at this time. So I'm looking for some good shares at attractive prices to add to my ISA.