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Investing for the long term makes a lot of sense to me. What seem like good investments in the short term can sometimes turn out to be brilliant ones over a longer timeframe. So when I choose companies to buy into using my Stocks and Shares ISA, I have an eye on how I think they may be doing a decade from now (or even longer).
With that in mind, if I had £20k to invest in an ISA and wanted to try and build wealth over the long term, here is the approach I would take.
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Setting a strategy for long-term growth
I would begin by deciding the approach I would take. For example, rather than put all my money into my single best investment idea, I would diversify across five to 10 different shares.
I would look for businesses I felt had limited growth prospects but high profitability that is likely to last, or ones I reckon could keep on growing. On top of that, I would only buy shares I felt were attractively priced – and that I could envisage holding for years.
In practice, that may not happen. Company performance can change, sometimes unpredictably. But, as a general rule, my approach would be to take a buy-and-hold approach to my Stocks and Shares ISA, rather than trading frequently.
Finding the right shares to buy
As an example of the sort of share I think investors should consider buying for an ISA to target long-term growth, I would use one holding of my own, Legal & General (LSE: LGEN).
It benefits from something I like when buying shares for the long term, namely a target market that is already huge and looks set to grow over time. That is the market for retirement-linked financial services.
Within that market, Legal & General can set itself apart thanks to a well-recognised unique brand, long history, and large customer base. The focus on retirement has helped to give Legal & General even more credibility in that space than when it was a more generalist insurer, in my view.
Are there risks? Of course. There always are with any share. For Legal & General, these include a market downturn hurting investor appetite for its policies. That could hurt revenues and profits. But, on balance, I see this as a strong firm with an attractive price tag.
Using money to earn money
Legal & General has been a disappointing performer over the past five years, falling 22%.
That fall is part of the reason I think the current share price is attractive. But I also like the FTSE 100 firm’s dividend yield of 9.6%.
To help build wealth over the long run, I would keep such dividends in my ISA. Not only are there potentially tax advantages to using such dividends as an additional source of funds inside my Stocks and Shares ISA on top of my annual allowance, I also think compounding could help me build wealth faster.
