A Stocks and Shares ISA is a remarkable tool for British investors. After all, it eliminates all capital gains and dividend taxes from the equation, allowing investment portfolios to thrive. And following the unpleasant stock market correction last year, now might be the perfect time to open one.
Don’t forget, over the long term, flagship indices like the FTSE 100 and FTSE 250 have historically increased, creating substantial wealth for those with patience. And with so many businesses now trading below their intrinsic value, investing today could be the first step to building an impressive nest egg.
Corrections create opportunities
With the economic uncertainty plaguing the financial markets courtesy of inflation, it’s not surprising that UK shares took a beating last year. The FTSE 100 has proven to be fairly resilient, but the same can’t be said for the FTSE 250, which is still down 15% compared to a year ago.
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Investing in a volatile market driven by emotion rather than logic can be risky. Panic-selling investors can send shares of even the most financially robust and promising enterprises down the drain. But for those who can identify such companies, this behaviour creates rare buying opportunities for their Stocks and Shares ISA.
In the long run, stock prices follow the performance of the underlying business. And suppose the market-cap of a top-notch firm is dropping significantly despite improving cash flows and earnings. In that case, buying shares today may turn out to be a fantastic investment.
The power of regular ISA investments
Crashes and corrections nurture a stock pickers market. However, picking individual stocks isn’t the only way to capitalise on this rare opportunity.
Looking at the FTSE 250, the index has delivered an average annual return of 10.6%, even after its slump in 2022. And investing a regular monthly sum of £250 using a Stocks and Shares ISA into something as simple as an index fund can capitalise on this long-term trend.
After 35 years of investing regularly, assuming this performance continues, an investment portfolio would be worth approximately £1.1m. Following the 4% withdrawal rule, that’s the equivalent of a £44,000 annual passive income. And it’s tax-free, thanks to the ISA.
Risk vs Reward
With the FTSE 250 still trading below its pre-correction price, the long-term recovery could push average returns even higher. But that’s far from guaranteed. As is the assumption that the index will continue to deliver its historical returns. Three decades is a long time. And multiple market crashes and corrections will likely occur during this period.
This will undoubtedly create new buying opportunities for shrewd investors. However, it may also derail the wealth-building process for existing portfolios, much like the correction in 2022 did. Depending on the timing of these events, a Stocks and Shares ISA may be worth considerably less than expected.
This risk comes with the territory of investing. And while tactics like diversification and pound-cost averaging can reduce the impact, they can’t be avoided entirely. Nevertheless, given the potential reward, it’s a risk I feel is worth taking.
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.
