S&S ISA Experiment – Getting Started

One of the triggers that got me started with this site was my recent experience of opening a Stocks & Shares ISA. I’d like to share my experience so far with all of you, in the hopes it might help if you’re in a similar situations. I’ll also post periodic updates, to see how this experiment works over the next year or so.

Why a S&S ISA?

Due to a series of fortunate events, I have a little extra monthly income that’s looking for a home. I’ve already fully matched my employer’s contributions into my workplace pension, and I don’t want to lock more money away until I’m 55 or 57 (setting aside the questions of a foreign grantor trust, but that’s another small part of it). I’ve also fully contributed to Roth IRAs for myself and my wife – thanks COVID stimulus!

So, using The Flowchart, I’m at the box asking “Are you comfortable with individual stocks?”

To be perfectly honest, I’m not 100% sure what my answer to that question is, but I’m going to have a go! I’m still a big believer in passive investing and I’m not looking to go into serious stock picking, much less day trading, but the US tax system has pushed me to try out individual stocks so I can avoid the punitive PFIC regime.

Where to open my ISA?

There are loads of brokers in the UK that offer S&S ISAs – Monevator has a great comparison list here. Unfortunately, most of those brokers don’t want to work with US citizens (thanks FATCA!). Eventually, I’d like to put together a definitive list of brokers that will work with Americans, but for the moment, this Reddit post has a good starting list.

I went with Hargreaves Lansdown, for three reasons:

  • They’ll happily work with Americans
  • They’re an established company with a good track record – I’m not worried about them disappearing in the night, and trust they will be around for a while.
  • Their fees are competitive – not the lowest out there, but not too bad:
    • 0.45% annual platform fee – for holding shares, this is capped at £45, so if your ISA grows larger than £10,000, the fee doesn’t go up any more.
    • £11.95 dealing fee (buying or selling of shares). This adds up quick, but I’m not planning on trading much. Also, if you set up automated monthly investments, this fee drops to £1.50.

Actually opening the account was easy – all online, and nothing extra complicated due to being a US citizen except needing to provide my US passport number. My account was open within a few minutes and the initial contribution went through my Nationwide debit card without any issues. Next step – picking the stocks to invest in.

Wait, why can’t I use index funds?

I’ll write a longer post going into the details of what a PFIC is and ways of dealing with this onerous US restriction. In the meantime, the Bogleheads wiki has a great explainer.

Very short version:

  • Unit trusts (mutual funds in American) and ETFs are almost all PFICs.
  • PFICs require the submission of an extra form on your US tax return, Form 8621. You need to do a copy of this form for each investment.
  • There are a few options for how to report the PFIC gains/losses – even the least punitive (mark to market) is still painful, because you have to pay taxes on any gains every year, even if you don’t sell the investment.
  • So the best option for most people will just be to avoid PFICs entirely.

Picking stocks for my ISA

Even though the US tax system has pushed me into individual stocks, I’m still a believer in passive investing generally. So I’m creating a “pseduo-index” or a “brew your own index fund” – trying to mimic the performance of an index using individual stocks.

Trying to actually own all the funds in an index would be hugely expensive due to the dealing fees – even at the lower £1.50 for an automatic investment, buying the whole FTSE 100 would cost £150, plus any additional investments later. That’s more than I wanted to spend on fees, plus owning 100 stocks makes for more bookkeeping headaches and more reporting on my US taxes.

So I decided to pick 20 of the largest stocks in the FTSE 100. Why the FTSE 100? Hargreaves Lansdown charges an extra 1.5% on foreign currency transactions, so I wanted to stick to stocks traded on the London stock exchange. I have a target of 10% UK stocks in my asset allocation anyway (future post to come on asset allocation more generally), so this counts against that.

Why 20 stocks? I did some crude backtesting against the overall FTSE 100, and found that 20 stocks felt like the sweet spot where it’s not so many stocks that it’s painful and expensive to manage, but not so few that the performance of any one stock will have a huge impact on the overall performance. This is not especially scientific – it just feels right to me.

So I got the list of all the FTSE 100 constituents, and started going down the list from biggest to smallest to pick the first 20. But as I looked, I realized some of these weren’t companies that I was particularly interested in over-investing in. These fell into two categories:

  • Companies that made me feel a little icky. Many of these are materials companies with questionable human rights records and a long colonial history of exploitation, or banks that facilitate money laundering and other criminal activities. I also ruled out tobacco companies, but not alcohol – you may have different ideas about what makes a company “icky”, and that’s fine!
  • Sectors that really don’t feel like a good investment in the current environment – for example, with interest rates so close to zero at the moment, I don’t see the environment for banks improving any time soon.

Both of these judgments are against the idea of index investing! But, this is an experiment, and it’s my money, so I’m going to try it my way. Worst case, this ISA will probably be less than 3% of my investments by the end of 2021, and even if one of these companies goes to zero, it’s a minor hiccup on my way to FIRE.

  • It’s worth mentioning that I do still own some of these stocks through index funds in other accounts. I’m not going out of my way to complete divest from them, I’m just choosing not to over-invest in these particular companies.

I also decided to equally weight each of the 20 stocks, instead of market weighting. Why? Because it’s simpler and easier to manage. To rebalance, I just add money to whichever stock has the lowest value, no complicated math involved.

Which stocks did I pick?

Here’s the list of FTSE 100 stocks, from biggest to smallest, with either my decision to invest, or a quick reason why I didn’t. I stopped once I got to 20 “yes” votes.

CompanyTickerDecision
UnileverULVRYes
AstraZenecaAZNYes
HSBCHSBANo – both a “slimy” bank, and a bank that I see struggling with low interest rates
DiageoDGEYes
Rio TintoRIONo – exploitative history, environmentally problematic
GlaxoSmithKlineGSKYes
British American TobaccoBATSNo – tobacco
BPBPYes
Royal Dutch SchellRDSA/ RDSBNo – exploitative history, and I thought one mostly oil company was enough with BP
Reckitt BenckiserRBYes
BHPBHPNo – exploitative history, environmentally problematic
PrudentialPRUNo – when I did the whole list, having two insurance companies seemed like more than enough, and Aviva seems more likely to succeed to me. But that’s just a guess.
Anglo AmericanAALNo – exploitative history, environmentally problematic
VodafoneVODYes
GlencoreGLENNo – exploitative history, environmentally problematic
London Stock Exchange GroupLSEGYes
RelxRELYes
BarclaysBARCNo – I see banks struggling for a while to come
National GridNGNo – two utility companies seemed excessive, and SSE seems like a better longer term bet with their focus on renewables
FlutterFLTRNo – the way gambling works in the UK seems icky, and online gambling commercials drive me crazy
LloydsLLOYNo – I see banks struggling for a while to come
CompassCPGYes
CRHCRHYes
NatWestNWGNo – I see banks struggling for a while to come
ExperianEXPNYes
FergusonFERGNo – overlap with CRH and Ashtead on the construction market, one seems like enough
AshteadAHTNo – overlap with CRH and Ferguson on the construction market, one seems like enough
Associated British FoodsABFYes
TescoTSCOYes
AntofagastaANTONo – exploitative materials
Legal & GeneralLGENNo – one insurer felt like enough, and L&G always comes across as a bit scammy to me (totally subjective!)
Scottish MortgageSMTNo – PFIC in disguise! UK investment trusts look like stocks, but they’re actually PFICs.
BAE SystemsBAYes
AvivaAVYes
Standard CharteredSTANNo – I see banks struggling for a while to come
OcadoOCDOYes
SSESSEYes
Skipped a fewlineshere, because I wanted the ones below
International Consolidated Airlines IAGYes – wanted an airline, because I think they may come back from COVID faster than expected (but that’s just my guess!)
Intercontinental HotelsIHGYes – wanted a hotel chain, because I also think they will come back faster than expected. IHG also has a somewhat COVID-resilient business model (they don’t own most of the hotels).

I did do a comparison of this portfolio against the overall market weighting of the FTSE 100 – it’s not all that out of whack, even with those very subjective decisions above (numbers as of Feb 2021, although I don’t expect them to change too fast):

SectorFTSE 100 WeightingMy Weighting
Consumer Staples20%24%
Financials18%18%
Industrials11%12%
Materials11%6%
Health Care11%6%
Consumer Discretionary10%18%
Energy9%6%
Utilities4%6%
Communications3%6%
Technology2%0%
Real Estate2%0%

Getting Started

Once I picked how I wanted to invest, getting started was pretty easy. I had funded the account initially with a few hundred pounds, which I invested into the top two companies. Then I set up a recurring plan to invest in the rest – I’ll do a large first month, because my annual bonus got paid in March, and then a few hundred pounds each month into whichever stock (or maybe 2 or 3) has the smallest value, with an aim to keep them all roughly equal.

I don’t plan on rebalancing through any sales, and I’m hoping I don’t need the money anytime soon. If I do, though, the flexibility of an ISA means I can take a withdrawal at any time and just pay the transaction fee and any US capital gains taxes.

Future Updates

There are a few things I’d like to explore some more over time, and will go into in future posts:

  • Tracking my ISA vs an index fund: how am I doing? Better, worse, about the same?
  • US taxes: since I started the ISA in early 2021, I won’t need to report anything until I do my 2021 US taxes, about this time next year. I’ll look at what records need to be kept, how the ISA gets reported on my taxes, and any pitfalls to avoid.

Is there anything else you’d like to know about a S&S ISA? Let me know in the comments!

15 thoughts on “S&S ISA Experiment – Getting Started

  1. I am delighted to have discovered your website after you cheekily mentioned it on the “US Expat Tax Questions” Facebook group. I can’t for the life of me find your post again – perhaps it has been removed 🙂 I think there must be only a select handful of people who are US citizen, UK tax resident, FI-style investors who have resorted largely to UK shares (and pension?) investments as a way to tread the fine line between US/UK/EU tax laws whilst also trying to keep costs down and avoiding expensive advisers. I’ve been investing one way or other in the UK for over 25 years, but more intensively over the last 10. I definitely think we should link up – in many ways you are my doppelganger! I’ve just been doing it for a bit longer… 😉 I’ve been living and/or working in the UK since the age of 6 as a US citizen (now UK/US dual) and our family plan to hit the FIRE button this year(!) Not including my UK wife’s final-salary pension, we are invested roughly 50%/50% split between SIPP and S&S ISA investments. The SIPP is all low-cost ETFs and is the result of the gradual merger of 3 employer, 1 personal, 1 stakeholder and 1 SIPP pension. I do take the opinion that the SIPP is US/UK tax friendly, but I follow the slightly riskier line that I don’t need to file IRS 3520/3520a forms. The ISAs, like yours, are invested in FTSE100 (and a few FTSE250) shares at Hargreaves Lansdown. Previously I was with X-O, then had to move to iWeb, then had to move to HL. I also manage my dad’s IRA, US pension, US social security, US and UK taxable brokerages, bank accounts (he’s now got dementia) – so you can imagine his US tax form is a nightmare! Our ISAs don’t follow the sector split of the FTSE100 (although I’m a huge fan of Monevator and the Lars Kroijer pure index ideology). Instead I follow a roughly 20-sector-equal-weight allocation across ~30 UK shares. I don’t have any qualms about “icky” investments. I’ve decided a long time ago that I don’t have to like a company’s products to invest in them. In fact I wouldn’t touch half the shares in the FTSE100 if I did! I lean heavily towards high-dividend payers to create cashflow, simplify my US tax return and take advantage of qualified dividends & long-term capital gains rates in the US. I almost never sell a share for the same reasons. I do have a Charles Schwab US brokerage, but without being able to use ETFs and the complexity of having shares in both countries I’m not currently using it. I will likely have an inherited IRA one day, but I will distribute and transfer that to the UK over about 5 years (it’s invested in US shares and one ETF that I can no longer add to). I think once lockdown has been lifted we ought to meet up at a pub sometime. I think we’d have a lot to talk about!

    Liked by 1 person

    1. Pleasure to meet you – and I agree, I think there aren’t that many people in this particular boat! Congratulations (almost) on reaching FIRE. I’m planning a few posts going into some details on my plans for what investments to hold and where, but the short version is that my UK investments are all in my employer pension with the exception of just starting a S&S ISA, US is a mix of TSP (with some previous 401(k)s rolled in), Roth IRA, and a little taxable brokerage (the IRA and brokerage are using a US address – TSP doesn’t care that I’m abroad, I’d roll the Roth IRA in there if I could). All low cost ETFs or similar, except for individual stocks in the S&S ISA. I’m inclined to agree with you on the SIPP approach – for the moment, I don’t really need one, but if/when I leave my current employer, it will become more pressing.

      I’m interested in your approach on the ISA sector weighting approach – have you done any tracking of that vs the index? I’ll be the first to admit that my approach so far is not terribly scientific, but it’s a learning tool – tiny part of my investments for now, and I have a hard time believing it will do too much worse than the overall index unless I get really unlucky. The “icky” part isn’t even logically consistent, since I already own those companies through index funds! I like the idea of not selling shares – between the capital gains and the brokerage fees, I hope to do the same until well into retirement, if ever.

      Definitely up for meeting up once the world gets a bit more normal – it’d be great to start to build a small community of like-minded people in this complicated situation!

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      1. I have some good long term performance history on my UK shares. The total return including dividends and after all costs tracks a low cost FTSE All Share ETF very closely. I’ve actually advanced a bit ahead of it lately due to the value tilt my shares have. I think we are lucky to have access to the FTSE100 because it is so international. I’m less worried about the home bias, although I have that taken care of by having international ETFs in my SIPP. I don’t hold any bonds, because my wife’s guaranteed DB pension acts like a large perpetual index-linked bond. Yes, I’ll be holding shares until the day I’m die, I’m sure. I think if you have a family then everyone holds a portfolio with a potentially infinite holding period. At the moment I see our house as something to downsize or more likely completely sell when I reach my dad’s age/health to pay for care. My kids have Junior ISAs (moving them from iDealing to HL right now), also with UK shares in them. They are both dual US/UK citizens. I wanted to give them the option of working or studying in the US one day if they wanted. I include them on my US tax return. I had to remember to include the Junior ISAs on my FBAR because I effectively have signature authority. Another subject you can get your teeth into one day is the whole estate-planning / gift tax / IHT minefield…

        Liked by 1 person

      2. I started some research on the estate/gift/inheritence tax bit – even just for normal people, it gets complicated fast. I’ve got that research about 90% ready for a post, but it’ll just be the basics, that’s enough for the moment!

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  2. Interesting stuff. The only other solution which I’ve seen mentioned is to buy US-based funds. This, in turn, causes an issue with HMRC which requires them to be “reportable” to avoid off-shore penalties, but there are many which are. This is what they describe as the “best” option here. https://thunfinancial.com/home/american-expat-financial-advice-research-articles/american-expat-pfic-uk-non-reporting-fund-investment-trap-article/

    The only issue, is I have been unable to find any broker which will allow the purchase of such US-based, UK-reportable funds within an ISA wrapper. Maybe some boutique company somewhere will allow it…

    And the second option to minimize fees is just put it all in Berkshire Hathaway. Their holdings are such that it’s almost an index fund if you squint. They are at least super diversified for the single £11.95 fee.

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    1. Thanks for commenting! Agree with your solution, and the challenge you’ve found. I believe the key obstacle is actually being able to buy funds that don’t produce a “Key Information Document”, as required by EU (now UK) law. US funds don’t do it; I’ve heard there’s a conflict between what the EU requires and what the IRS requires, and they’re mutually incompatible, something about forward looking statements. Regardless of the detail, it means it’s almost impossible to buy a US fund as a UK/EU retail investor, if the broker knows you’re a UK/EU resident.

      One way around it would be to become an accredited investor – I think it’s €500k+ investable with a set number of transactions and/or working in the financial industry. But that doesn’t help me! I think you can also get an broker to advise you to enable you to do it, but it’ll be some boutique company with high fees for that advice.

      The Berkshire Hathaway idea isn’t a bad one, either. Could do some other companies with similar large portfolios, too (Softbank comes to mind, I’m sure there are others). Still get the added foreign currency fees, but it’s a lot of diversification.

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      1. Yes I think you’re right. Although I *think* this is all due to UCITS rules, which the UK will no longer be subject to? Maybe they’ll start to be offered now that we’re out of the EU?

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      2. I think it’s one of those things where the UK “could” diverge, but will see if they actually do, or if they stay close to the EU on financial regulations to ease UK financial companies doing business in the EU.

        I also saw somewhere (can’t find it now) that there’s a campaign to relax the KID/UCITS/MiFID requirements for things like index funds, especially where there’s no “selling” to the investor involved. It’s all supposed to be about consumer protection, but it’s prohibiting consumers from making good decisions!

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      3. Actually, it’s the MiFID II and PRIIPs rules. If anything, UK investor protection rules tend to be even stronger than European ones.

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  3. Hi there, I love a good experiment and am glad I’ve come across this!

    I’ve been running my own experiment for that past few years, my ‘Dogs of the FTSE’ portfolio, which is of course based on the Dogs of the Dow strategy. I’ve not been so ethically selective as you have been however.

    It’s been hit and miss, although looking good for this year (aren’t all stocks though?)

    In the past, I also ran an experiment based on the ‘blind-folded monkeys selecting stocks by throwing darts’, namely picking stocks at random! That was surprisingly quite successful and might be something I would consider again in the future.

    All the best with your experiment!

    Liked by 1 person

    1. Thanks – I happened to see your update on the Dogs of the FTSE experiment through the weekly FIRE UK blog posts. Very interesting!

      I fully admit the ethical part of mine is pretty arbitrary (why am I ok with bp and BAE but not BAT and Rio Tinto?) and inconsistent (I already own all the companies I skipped as part of index funds, and none of my index funds are “ethical”, just market cap based). But humans are irrational 🙂

      The blind folded monkeys approach is interesting too – probably more scientifically valid than mine, if you’re trying to replicate the index, although you’d need enough stocks that you’ve got a representative sample, so the fees might kill you.

      Good luck with your experiment as well!

      Liked by 1 person

  4. I used to follow Stephen Bland’s HYP (High Yield Portfolio) via his “Dividend Letter”. That ended in 2018 but he was a good teacher, so I’ve kept on following his style of investment. I’ve had a portfolio of individual shares since 2011, but only really switched to a “sector equal weight higher-yielding mostly FTSE 100 never sell”-style portfolio in 2013. I now have 20 sectors, with half of them split between two companies, like this:

    BT
    Vodafone

    Imperial Brands
    British American Tobacco

    Severn Trent
    United Utilities

    BHP Group
    Anglo American

    Legal & General
    Aviva

    SSE
    National Grid

    BP
    Shell

    Land Securities
    British Land

    GlaxoSmithKline
    Astra Zeneca

    BAE Systems
    Carnival
    HSBC
    IG Group
    ITV
    Marstons
    Persimmon
    Sainsbury
    Standard Life Aberdeen
    Unilever
    WPP

    You need to have been building up your sectors over a long period of time to have this number of shares without paying a fortune on trading fees. Over the past 10 years my average annual platform and trading fees have been 0.19% including stamp duty and a couple platform transfers. This is actually slightly cheaper than using a Vanguard ISA to invest in the Vanguard FTSE 100 Index Unit Trust, which I obviously can’t use, so I consider that a success cost-wise.

    If I was starting a new portfolio today, I would happily buy any of these shares apart from probably WPP, AZ, Pearson, Marstons and Carnival. However, I wouldn’t sell any of these of I still held them. I practice what Stephen Bland used to call “strategic ignorance” 🙂

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    1. Interesting approach, and seems sensible. Eventually I will likely need to formalize my strategy and diversify my ISA more – will see how big it winds up getting. For now, it’s my third priority, after my pension and Roth IRA, although the Roth is just slowly converting money from a US taxable account (or any more stimulus checks!), would like to avoid fees on transferring earned GBP to USD, with the expectation of some day having to go back to GBP.

      Like

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