Investing in a Stocks and Shares or Lifetime ISA is one of the most effective ways to build wealth in the UK. This is due to the fact that, within these accounts, all gains and income generated from investments are tax-free.
Here, I’m going to discuss how I’d invest £5k in an ISA. This is how I’d go about putting my money to work.
What am I trying to achieve?
The first thing I’d do, if I had £5k to invest today, is determine my financial goals. I’d spend some time thinking about what I’d want to achieve from my investment.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
I’d also think about my tolerance for risk. Would I be seeking capital preservation? Or would I be comfortable with short-term fluctuations in the value of my money?
When thinking about my goals and risk tolerance, I’d consider my liquidity requirements. I’d think about whether I might need access to my money any time soon. Because this would impact the way I’d invest it.
I’d also think about how the £5k investment could play a role in my life. For example, I could aim to build a substantial retirement portfolio with this money. Or I could aim to build up the funds to travel the world at some stage.
Thinking about these factors would help me determine the time horizon for my money. Once I had a good idea of my goals and risk tolerance, I’d be in a much better position to invest my £5k.
Investing to build wealth
Now, personally, my financial goal when it comes to my Stocks and Shares and Lifetime ISAs, is to build a huge, seven-figure investment portfolio for retirement. I’m comfortable taking on a relatively high level of risk to achieve this goal as I have time (15-20 years) to ride out any market volatility.
In light of this goal, I’d be looking to invest in companies that are going to see their share prices climb meaningfully higher in the years ahead. I’m talking about companies capable of generating gains of 100%, 200%, 500%, or more, over time.
How could I find these? Well, history shows I could give myself a good chance of success by investing in companies that:
- Operate in growth markets (cloud computing, electronic payments, digital healthcare, etc)
- Have strong competitive advantages (a powerful brand)
- Are very profitable and can reinvest their profits for future growth (taking advantage of the power of compounding)
- Are financially sound
- Are trading at reasonable valuations
I see Alphabet (the owner of Google and YouTube) as a good example of such a company. It operates in growth industries (digital advertising, cloud computing, etc), has some of the most powerful bands in the world, is very profitable, has a strong balance sheet, and trades at an attractive valuation.
Of course, I’d want to spread my money across many different companies. While Alphabet has a great track record of generating wealth for investors over the long term, there’s no guarantee it will continue to do so.
By spreading my money over different growth stocks, I’d give myself the best chance of achieving my goals.
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.
