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The new Stocks and Shares ISA year has just begun. This means that an investor can invest up to £20k over the next year from their pocket and benefit from a tax-efficient savings account. Given that ISAs are generally used for long-term investing, it’s worth thinking about how a regular stock purchasing plan could turn into a sizeable portfolio in the next five 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.
Focusing on the future
In order to try and ramp up the potential return, an investor would want to focus on the type of stocks being bought. I think it’s a good idea look to allocate the bulk of the portfolio (70%) in growth stocks. The other 30% could be put towards dividend shares.
The focus on growth shares is because these companies typically provide the opportunity to capture the largest share price appreciation over the long term. Of course, they are often the hardest hit during downturns and market uncertainty. But let’s say someone is starting this strategy this month. The recent market dip due to tariff concerns means there are some attractive options right now!
Within the growth space, I’d suggest focusing on sectors such as AI, renewable energy, and fintech. These themes should be key in the market for the next decade. As a result, it should help to keep the share prices rising as earnings follow suit.
The allocation to dividend stocks aims to help smooth out future returns. Even if growth shares underperform for a period of time, the income made from dividend stocks can help offset the effects. Given that the FTSE 100 and FTSE 250 provide options yielding more than the current base rate, there’s plenty to like.
Ideas to mull over
One example of a growth stock in an expanding sector is International Personal Finance (LSE:IPF). The fintech stock is up 32% over the past year.
The UK-based company operates across Central and Eastern Europe, Mexico, and Australia. It mainly makes money from the provision of credit to consumers, but it is increasingly expanding into digital lending via mobile apps and online platforms. This is good for the future, as this route to market is lower-cost to scale and often more efficient.
The business is helping to fill a niche in some of these emerging markets, where people sometimes lack access to traditional credit services. The potential target market is vast, meaning I believe it has significant scope to grow in the coming years.
Of course, providing credit and loans is a risky business. If the company experiences an unexpectedly high level of defaults, it could put pressure on its sustainability.
ISA pot potential
Based on my figures, I think it’s reasonable for the mix of growth and dividend shares to generate an average annual return of 8%. With a £350 investment each month, the portfolio could be worth £26.2k in April 2030.
If an investor decided to keep this strategy going for another decade, the sum could grow to £122.3k. The actual figures could end up being higher or lower than this, depending on market conditions. But it goes to show that by targeting specific growth areas, even a relatively modest monthly amount can do very well over time.
