The Stocks and Shares ISA gives British investors a distinct advantage over rental real estate moguls. Buy-to-let continues to be a proven and popular method of building wealth. However, the increasingly hostile tax environment is slowing the process. Meanwhile, rising interest rates aren’t helping profit margins now that mortgages are getting more expensive.
By comparison, investing in shares has significantly lower barriers to entry. And by using an ISA, tax considerations can be completely eliminated from the equation. What’s more, in the long run, investing as little as £500 a month is enough to reach millionaire territory. Let’s explore how.
Making a million?
Over long periods, the stock market has historically trended up. Why? Because stocks ultimately represent businesses which seek to expand and deliver growth. Of course, not every enterprise is successful. But for those that make it into the FTSE 250, the risk of failing is significantly lower than those in penny stock territory.
That’s arguably why the growth index has delivered average annual total returns of 10.6% since its inception in 1992. And with a strategy as simple as autopilot investing in an index fund, investors can tap into this opportunity with their Stocks and Shares ISA. Even starting from scratch, injecting £500 monthly at this rate of return would build a million-pound portfolio within 28 years.
Obviously, that is a long time. But the process can be accelerated. Let’s say an investor earns sufficient income to spare £1,000 a month for their portfolio. In that case, reaching a million with a FTSE 250 index tracker could only take 22 years.
But the process can be shortened even more by picking individual stocks. A carefully constructed portfolio containing high-quality enterprises bought at sensible prices can often deliver market-beating returns. Even if it only outperforms by 2%, that’s enough to wipe out another two years from the waiting time.
Nothing is risk-free
Unlike real estate, the stock market is considerably more volatile. As 2022 kindly reminded everyone, stocks don’t always go up. Crashes and corrections occasionally rear their ugly heads and can substantially set investors back along their wealth-building journey.
The FTSE 250 dropped by as much as 30% last year and has yet to recover to fully recover. Therefore, as exciting as the prospect of becoming an ISA millionaire with an index fund sounds, the process could take significantly longer than expected.
The risks are only amplified for individual stock pickers. Achieving a 12.6% annualised return requires considerable skill and emotional discipline that many individuals lack. After all, it’s not easy to keep a cool head when shares in a portfolio are all seemingly in a free-fall for no apparent reason. And even the best Stocks and Shares ISA portfolios can destroy wealth if improperly managed.
Investing has its risks. But given the potential rewards for patient investors, it’s a pursuit worth taking. At least, that’s what I think.
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.
The post Forget buy-to-let! I’d aim for a million with a Stocks and Shares ISA instead appeared first on The Motley Fool UK.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.