The Stocks and Shares ISA is a powerful investment vehicle. Not only does it offer access to a range of assets that can grow wealth quickly (like stocks and funds), but all gains and income generated within it are completely tax-free.
Want to see an example of how powerful this kind of investment account is? Here’s a look at how much money I could potentially build if I contributed £300 a month into one of these products for 10 years.
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.
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Aiming for 8% a year
There’s no standard annual return with Stocks and Shares ISAs. Ultimately, these will depend on what you decide to invest in, and there are many different options.
With a decent investment strategy however, I think it’s reasonable to expect an 8% return a year over the long run. It’s generally said that stocks return between 7-10% a year over the long term, so I think 8%’s very realistic.
The key to achieving this kind of return is building a well-diversified investment portfolio. If an investor only owns a handful of stocks, the risk is generating lower returns as performance could be dragged down by weakness in the portfolio.
Similarly, investing only in one geographic market such as the UK runs the risk of underperformance. Recently, I calculated that over the last 20 full calendar years, the UK’s FTSE 100 index had only returned about 6.3% a year.
A sound investment strategy
Building a diversified portfolio isn’t hard however. One easy way is to invest in a global index fund such as the Vanguard FTSE All-World UCITS ETF (LSE: VWRP). This investment fund allows exposure to over 3,500 stocks including big names like Apple, Amazon, and Nvidia. They also get access to different geographic markets such as the US, Europe, the UK, and Asia.
In terms of performance, this particular fund’s done well in recent years. Over the five-year period to the end of October, it returned 69% (before platform fees and trading commissions), which equates to about 11% a year on an annualised basis.
Of course, past performance isn’t an indicator of future returns. If there was a global stock market pullback, this product would deliver poor returns in the short term (and perhaps further down the line).
Overall though, there’s a lot to like. With its ongoing fee of just 0.22% a year, I think this fund could be an excellent foundation for an investment portfolio.
Add in a few individual stocks or niche investment funds to target specific areas of the market (eg artificial intelligence (AI) or healthcare) could help build a very decent portfolio.
Turning £300 a month into thousands
Going back to the 8% return a year though, let’s say I put £300 a month into a Stocks and Shares ISA for 10 years and I was able to generate that return on average. In this scenario, I’d have about £52,000 at the end of the decade.
That’s a substantial amount of money. And I wouldn’t have to pay any tax on it. What a great result.
