Image source: Getty Images
Millions of us use the Stocks and Shares ISA. It’s an indispensable vehicle for most of us who are investing with small-to-medium-sized pockets of cash.
Essentially, the ISA wrapper allows us to add up to £20,000 annually to our investment accounts. And from that point onwards, any returns that money makes is free from taxation.
This is clearly really advantageous for many reasons. The first among these is compounding. If I was paying capital gains tax on every stock victory of mine, my portfolio would be growing a lot slower.
The second is dividends. Many of us invest with the idea that we’ll one day invest in dividend-paying stocks and take a useful passive income. Of course, this passive income would be tax-free.
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.
Aiming for £1m
If that initial £20,000 were invested in a broad-based equity index or a portfolio achieving an average annual return of around 10%, it could grow to £1m in around 38 years without adding another penny.
That figure isn’t pulled from thin air. Over the long term, markets such as the S&P 500 have historically delivered annualised returns in the 8%-10% range, especially when dividends are reinvested.
Of course, waiting nearly four decades might not be everyone’s preference. This is where additional contributions make a significant difference. Regularly adding to the ISA — even a few thousand pounds a year — can dramatically shorten the timeline.
For instance, contributing £5,000 annually on top of the initial £20,000 with the same 10% return, would reach £1m in just under 25 years. Larger annual contributions could shorten it further still, especially for those making use of the full £20,000 annual ISA allowance.
Where to put the money?
When starting from scratch, a good idea is to look for opportunities for immediate diversification. This can be done through investments like funds, trusts or ETFs. For some time I’ve favoured Scottish Mortgage Investment Trust (LSE:SMT) as it offers exposure to fast-moving US growth stocks.
Scottish Mortgage’s global portfolio invest in both public and private growth companies across a wide range of sectors and industries. Its managers select companies based on strong belief in their long-term potential, not just to match an index. These private investments also provide exposure to innovative and fast-growing businesses that might otherwise be difficult to reach.
The trust’s top holdings include leading tech names such as SpaceX, MercadoLibre, Amazon, Meta, and Ferrari. The first two represent around 7.2% and 6.6% of the portfolio and are the two largest holdings. Ferrari’s something of an outlier as the investments are typically more tech focused.
However, investors should be aware of the risks associated with gearing (borrowing to invest), which currently stands at around 9% of total assets. While gearing can amplify returns in rising markets, it also increases potential losses if investments underperform, as the trust must still repay its borrowings and interest.
It’s a core part of my portfolio and one I think investors should consider.
