I thought my first ISA – a Cash ISA, rather than a Stocks and Shares ISA – might make me rich.
Then, I saw the £1,000 I put in return around 20p per month. What I actually got, it turned out, couldn’t even pay for a pack of crisps.
These days, I’m much more clued up on how to invest with an ISA. Let’s say I had my time again. This is what I’d do with the first £1,000 to actually start building long-term wealth.
How to avoid a 1%-2% return
The mistake I made with my first ISA was to use a Cash ISA. These accounts are popular because the interest is guaranteed, and they are useful for some situations like short-term saving, for example.
The problem is the returns I’d get depend on interest rates set by the Bank of England. They’re quite high now – at 4.25% – but for the last decade, my interest would have hovered around a miserly 0% and 1%.
To make matters worse, banks don’t usually pass on the full interest rates. The bank I use for my current account wants to offer me a Cash ISA with a 2.3% return. I don’t think that’s high enough for me to build any substantial wealth.
£1,000 or lower
I can flip the situation on its head by investing in stocks. If I own a piece of a company, I can share in the profits, which will help my own savings build up.
Best of all, I can start with any amount. A £1,000 amount is a great starting point, and even a £50-£100 stake in a company isn’t unusual.
In the UK, I can invest through a Stocks and Shares ISA which also gives tax advantages.
These accounts are offered by some banks, but also brokers like Hargreaves Lansdown or Vanguard. Those companies would buy or sell the shares in companies on the stock exchange on my behalf for a small fee.
Best of Britain
An excellent option for my first £1,000 would be to invest in an index tracker. This is like buying into lots of companies all at once.
For example, a tracker like FTSE 100 UCITS ETF from Vanguard simulates owning all 100 companies on the FTSE 100 at the same time.
That means my £1,000 would be invested in huge British firms like Aviva, AstraZeneca, Tesco, or Rolls-Royce. One way of thinking about it is it’s like every employee in those companies is working to make me money.
The average return for the FTSE 100 is around 8%. That sounds pretty good to me, however historical performance is only a guideline. It’s not a guarantee of what I’d get.
Following Einstein’s advice
Another option is to use my £1,000 to invest in individual companies.
This is riskier, as I may put my money in a company that goes bankrupt. But on the other hand, an increased 10%-12% rate of return could make a huge difference in the net worth I could build.
For example, at 12%, even just £1,000 per year for 30 years snowballs into a £271,000 stake.
That amount sounds crazy from an initial £30,000 investment. But it works thanks to compound interest – what Einstein called the “eighth wonder of the world”.
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.
