My Stocks and Shares ISA forms a core part of my investment plan. And most of my shares are held in this wrapper.
I started my investment journey relatively early. But if I were making my first purchases at the age of 40, there are some things that I would do a little differently.
First, I’d note that it’s not too late at this age. Three main factors will determine how much wealth I build.
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First, how much can I afford to invest every month. Second, how many years can I continue to do so. And third, by how much will my Stocks and Shares ISA grow during that time.
The Stocks and Shares ISA plan
Let’s say I consistently invest £800 a month over as little time as 15 years. Assuming an average 10% a year return (which isn’t guaranteed, of course), I calculate that I’d build a savings pot worth over £300,000.
Thereafter, I could invest in high-quality dividend shares to target a 6% a year passive income. That would be enough to earn £18,000 a year. It would certainly help bring forward my retirement plans.
To give this plan the best chance of success, I need to ensure I stick to it. Regular and automated additions to my ISA will have three benefits.
First, any gains (through dividends and share price appreciation) will be protected from capital gains tax.
Second, such investing will prevent me from spending my money elsewhere. And arguably more importantly, it will allow me to benefit from ‘pound cost averaging’.
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Pound cost averaging
Over short periods like days, weeks and months, share prices move higher and lower depending on multiple factors. That can include market sentiment, government policies, and company trading updates.
One thing to note is that these are often temporary factors. If I’m investing for many years, I’d like to take advantage of short-term stock market wobbles. But it’s often psychologically difficult to do so at the time.
That’s where pound cost averaging comes in. Buying at regular intervals regardless of the state of the market would allow me to smooth out the ups and downs.
Which shares?
Next, I’d need to decide what to invest in. Here I’d do some homework to find a selection of growth, value and income shares to add to my ISA.
I prefer to diversify and own a variety of these styles to avoid putting all my eggs in one basket.
That said, in each of these buckets, it’s still important to own high-quality shares. But what makes a high-quality share? That can be subjective, but there are some characteristics to focus on.
Buying good businesses
According to popular investor Terry Smith, return on capital employed (ROCE) is the single best metric to determine how good a business is. This measures how efficiently a company uses its cash to generate profits.
And like Warren Buffett, I’d like my companies to have sustainable competitive advantages. Or ‘moats’ as he likes to call them. Multiple years of high profit margins could indicate the presence of a moat. Some shares that I reckon could be described as high-quality include Apple, Diageo, and BAE Systems.
