The tax advantages of a Stocks and Shares ISA are becoming increasingly valuable. With the latest government budget almost eradicating dividend and capital gains allowances, investing outside a tax-efficient account is becoming increasingly expensive. And that’s an especially unwelcome sight given the ongoing cost-of-living crisis.
This is where British investors have a significant advantage over buy-to-let landlords. Being a member of the latter group can still be immensely profitable. But it’s becoming increasingly challenging in the face of falling house prices and higher taxes on any rental profits.
Therefore, in 2023, I believe it’s far more lucrative to be a stock market investor capitalising on the benefits of an ISA. It could even result in building a £1m portfolio.
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Making a million in the stock market
Investing in equities has a reputation for being risky. And given all the chaos endured in 2022, it’s not hard to see why. But when zooming out over the course of decades, an interesting trend emerges – the stock market goes up.
Why? Because at the end of the day, each stock has a business underneath it. And the businesses which succeed often wipe out any losses incurred by the ones that fail. That’s why the FTSE 250 index has historically delivered an average 10.6% return, despite some of its once-largest constituents like Cineworld tumbling into bankruptcy.
As it turns out, this rate of return is more than enough for patient investors to build a seven-figure portfolio in the long run. In fact, investing just £500 a month at this rate of return would yield a seven-figure Stocks and Shares ISA in under 28 years. That’s roughly only two-thirds of the average time spent in a career. And for those living a more modest lifestyle, it could be sufficient to retire early.
Having said that, 28 years is still a very long time, even for a patient individual. So is there any way to accelerate this process? Yes. It’s called stock picking.
Instead of tracking an index, investors can choose to invest in a specific collection of businesses to pursue higher returns. This requires significantly more time, knowledge, and dedication. But even if a portfolio generates just an extra 3% each year, that’s enough to wipe out almost five years from the waiting time!
Risk vs reward
As exciting as the concept is to build a £1m Stocks and Shares ISA, it’s important to stress nothing in the world of investing is guaranteed. Just because the FTSE 250 has yielded an average 10.6% return in the past, it doesn’t mean it will continue to do so in the future.
The risks are only amplified when it comes to stock picking. Successfully identifying the best shares to buy is a challenge in itself. But remaining calm and emotionally disciplined during times of volatility is even harder. And it’s usually the latter that’s responsible for most stock pickers (even professionals) failing to generate a positive return, let alone beat the market.
Nevertheless, patient investors can leverage the compounding returns of stocks to increase their wealth. And while it’s impossible to completely eliminate risk, taking a disciplined approach can help mitigate it on the path to a larger Stocks and Shares ISA.
