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Investing in the stock market with a Stocks and Shares ISA is one of the most effective ways to build tax-free wealth in Britain. Even for someone who’s just turned 50 with no savings, regularly and intelligently drip feeding money into the financial markets can potentially grow a substantial portfolio before retirement.
With that in mind, let’s explore just how much money an older investor can make with a 20-year time horizon and £700 to spare each month.
Setting expectations
A Stocks and Shares ISA itself isn’t an investment. But rather a vehicle to access and invest in the stock market without HMRC knocking on the door.
In fact, all capital gains and dividends earned inside an ISA can be enjoyed 100% tax-free – an advantage that’s only become more powerful as regular tax allowances have been steadily cut over the 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.
With a proper investment strategy, it’s not unreasonable for investors to earn close to 8% a year over the long run. There are never guarantees, of course. But assuming a portfolio generates this average gain, investing £700 a month for 18 years translates into a portfolio worth just over £410,000. And that’s a nice retirement bonus to sit alongside a workplace pension and the State Pension.
Investing intelligently
It’s no secret that the stock market can be a volatile place. And by jumping in headfirst without a plan, investors could earn considerably less than 8% and potentially even destroy wealth rather than create it.
The key to unlocking strong long-term returns is to build up exposure to a wide range of top-notch businesses operating in various sectors and geographies. That way, when one company or industry runs into trouble, the impact is offset by the continued success of the other portfolio positions.
Of course, the question now becomes, which stocks should investors buy? This is where investors need to get their hands dirty and dive into research.
So let’s start with what is arguably the most popular stock to buy in the UK – Lloyds Banking Group (LSE:LLOY).
A bank stock worth considering?
Thanks to higher interest rates, Lloyds’ earnings have been on a bit of a rampage of late. Profitability has significantly increased over the last few years. And while rates are starting to fall again, this is also sparking higher demand for new, more affordable loans from businesses and consumers alike.
Overall, the bank’s all-important return on tangible equity is beating analyst expectations. And with that stock trading at an undemanding price-to-earnings ratio of 12.5, it’s easy to understand why investors are bullish.
However, even a bank as big as Lloyds has its weaknesses. Even after a favourable Supreme Court ruling relating to the motor financing scandal earlier this year, the Financial Conduct Authority (FCA) is still preparing a potential redress scheme. And if it proves to be more onerous than expected, the highly exposed bank could find itself incurring significant financial and reputational damage.
This unknown factor creates a lot of short-term uncertainty. And with Lloyds shares having experienced strong upward momentum of late, it runs the risk of potential panic selling. That’s why, despite their popularity, Lloyds’ shares are not a tempting addition to my Stocks and Shares ISA.
Instead, I’m hunting for other growth opportunities that remain under the radar.
