Investing in the stock market is my preferred way of building wealth. And if these investments are made through the Stocks and Shares ISA, the portfolio could compound much faster as the taxman won’t be getting his hands on capital gains and dividends.
So why start investing at 30? Well, with 30 years of contributions through to the age of 60, an investor could, if averaging 10% annualised growth, achieve a portfolio worth £904,000. In turn, this could generate £45,000 annually. All tax free. This could allow an investor to retire early and it will eventually be complemented by a pension.
In short, this is significantly higher than what a traditional savings account would yield, even with consistent contributions.
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Compounding matters
Compounding matters. It allows returns to generate their own returns over time, creating a snowball effect that accelerates wealth growth. For example, in the early years, the growth may seem modest but, over decades, the gains become exponential. By the end of the 30-year period, the annual growth could exceed £85,000.
By comparison, savings accounts typically offer around 3% annual growth, which barely keeps pace with inflation. By contrast, the MSCI World Index has delivered an average annual return of 11.1% over the past 45 years. This stark difference highlights the importance of investing in the stock market for long-term financial goals.
And with a portfolio worth £904,000, an investor could reallocate funds towards dividend-paying stocks, and bonds. In the current market, an average dividend yield of 5% is very achievable. This may not always be the case. But assuming it is, it would allow for a £45,000 passive income.
However, it’s worth noting that £45,000 in 30 years will feel like approximately £21,450 in today’s money, assuming a 2.5% annual inflation rate. Nonetheless, it’s tax free and arguably enough for most people to live on.
Making wise decisions pays dividends
Making wise investment decisions, in the long run, will likely contribute to positive outcomes. However, poor investment decisions can result in investors losing money. In fact, many novice investors chasing quick gains lose money, and fast.
The first rule of investing, according to billionaire investor Warren Buffett, is don’t lose money. And for novice investors, this could mean finding diversification through index tracking funds, investment trusts, or conglomerates.
An interesting alternative to an index tracker is Scottish Mortgage Investment Trust (LSE:SMT). This UK-based trust has an incredible track record of investing in the next big winner before most of us have even heard of it. And that’s why it’s one of the most popular investment trusts in the UK.
Most of its big investments are in US and Chinese tech. In fact, its focus remains on tech companies despite the addition of some luxury brands such as Kering and Ferrari.
Over the past decade it’s delivered a 331.7% share price total return, significantly outperforming the FTSE 100. However, its use of gearing — leverage — introduces risk, amplifying both gains and losses, particularly in volatile markets. Nonetheless, I’ve recently topped up my position, drawn to its long-term potential despite the inherent risks.
