Investing within a Stocks and Shares ISA is one of the most effective ways to build wealth in the UK. With a regular savings plan and a sound investment strategy, an investor can potentially build a lot of capital over the long run with these accounts.
Here, I’m going to look at how much money a 45-year-old could potentially build up by retirement if they were to put £700 a month into this type of ISA. Let’s dive in.
Attractive returns
There’s no guaranteed return on offer with the Stocks and Shares ISA. This is due to the fact that it’s an ‘investment vehicle’ and not an investment.
With a proper investment strategy however, it’s not unreasonable to expect a return of 8% a year (after fees) over the long term. And with that kind of return, money can grow quickly due to the power of compounding (earning a return on past returns).
Invest £700 a month starting at age 45 and earn an 8% average annual return on the money, and you’d have around £385,000 by age 65, or £515,000 by age 68. That could be a nice little retirement bonus to sit alongside a work pension or Self-Invested Personal Pension (SIPP).
It’s worth pointing out that all gains generated inside a Stocks and Shares ISA are tax-free. So the investor wouldn’t have to pay a penny of tax on this money – a great result.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investing properly
Now, I mentioned an investment strategy above and this is crucial if one wants to achieve attractive returns within a Stocks and Shares ISA. Invest without a plan and/or in the wrong assets, and long-term returns could be well be below 8% year (they could even be negative).
The key to achieve strong long-term returns is to build a diversified investment portfolio that has exposure to many different businesses. By doing this, you can mitigate the risk of any single company’s failure significantly impacting your returns while simultaneously increasing the likelihood of capturing gains from the market.
The good news is that building a diversified portfolio is super easy today. With index funds, you can literally do it in minutes. These funds typically offer exposure to thousands of stocks. So they offer instant portfolio diversification.
A good example of an index fund is the iShares Core MSCI World UCITS ETF (LSE: SWDA). This is a global investment fund that offers exposure to around 1,400 stocks.
With this product, an investor gets exposure to all the big names in the stock market such as Apple, Amazon, and Nvidia. However, they also get exposure to smaller companies such as CrowdStrike, London Stock Exchange Group, and Sage.
I’ll point out that in recent years this ETF has returned far more than 8% a year. Over the 10-year period to the end of January, for example, it returned 174% (in US dollar terms) which is about 10.6% a year.
That said, past performance is no indicator of future returns. And if the world was to experience an economic slowdown, or the Technology sector (which has a large weighting in the ETF) experienced some weakness, this fund could underperform.
I believe it’s a good product to consider though. In my view, this ETF could be an excellent foundational investment for a Stocks and Shares ISA.
This post was originally published on Motley Fool
