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I hesitate to say anything is a ‘no brainer’ move when it comes to investing. However, I think this is absolutely the case when it comes to opening a Stocks and Shares ISA. Doing so means an investor wouldn’t be taxed on any profits they make or dividends they receive.
So, exactly how much cash would someone need to accumulate in this account to then generate £800 of monthly passive income? Well, that partly depends on how much they have to invest and how long they plan to stay invested.
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.
Average performance, great results
Let’s assume an investor is able to save the maximum £20,000 ISA allowance in Year 1. Let’s also assume that they were able to generate 7.5% return from their portfolio every year. As it happens, that’s roughly the average long-term performance of the FTSE 100 (including dividends). Sure, the past is no guide to the future returns. But it’s probably the best gauge we have.
Throwing all that in my trusty calculator gives me a total pot of almost £130,000 after 25 years. Moving into big dividend-bearing stocks and achieving a 7.5% yield would then produce £9,724. Spread over 12 months, this becomes a smidgen over £800 per month to supplement any other income (possibly a pension).
Ahead of the herd
Naturally, a lot of assumptions are being made here. That monthly income won’t look so magnificent in a quarter of a century either. We can thank the eroding power of inflation for that.
On a more positive note, the example assumes that £20,000 is invested once and nothing else. If an investor wanted to speed things up, they might consider putting extra cash to work in subsequent years. They can also try to beat the market by hunting for only the best growth stocks money can buy. This might compound wealth at a faster rate.
As it happens, this is exactly the strategy of FTSE 100-listed Scottish Mortgage Investment Trust (LSE: SMT). While the last three years or so have been tough going, its share price has massively outperformed the index over the long term.
A lot of this can be attributed to buying into some of the world’s biggest tech stocks before every investor and their dog decided to do the same. Think Tesla in 2013, when it was trading at around $6 a pop. As US markets closed last night (6 January), that very same stock was changing hands for $411. And it really only takes investing in a few incredible winners like this to make a difference.
Opportunities galore!
Of course, a person trusting all their hard-earned cash with just one manager could be a recipe for disaster if the latter’s picks don’t perform. And the market does have some worries that Scottish Mortgage’s penchant for holding stakes in private companies that are hard to value may come back to bite it (and holders) if the economic outlook worsens.
For this reason, I think it’s worth considering stocks that might be flying under the investment trust’s radar or be too small to consider buying a stake. And I reckon there a quite a few brilliant opportunities in our own very-reasonably-priced UK stock market right now!
