Pound cost averaging is a simple strategy any investor can use to build wealth in the stock market. When combined with the benefits of a Stocks and Shares ISA, this approach could help investors like me make a million.
Today, I’m going to explain how.
Stocks and Shares ISA
Using a Stocks and Shares ISA is one of the easiest ways to invest in the stock market. Most online stock brokers offer one of these products. They’re almost identical to traditional dealing accounts.
The key differences are the fact we can only put away £20,000 a year, and any money held inside an ISA doesn’t attract any additional income or capital gains liabilities. We can also only invest in stocks that are traded on what the government calls a recognised exchange. This essentially means any developed market stock market, as well as AIM.
As such, if we’re investing less than £20,000 a year in UK stocks, these wrappers can provide tremendous benefits.
Most investors don’t have £20,000 just sitting around ready to invest in a Stocks and Shares ISA. That’s why a monthly investment plan is the best alternative, in my opinion.
Many online stockbrokers offer a regular investment plan, starting from as little as £25 a month. These plans are relatively straightforward to set up. Once we’ve paid the deposit and chosen the investments, they run themselves.
Investing in the stock market
Choosing the investments is the hard part. Buying a basket of high-quality blue-chip stocks may be the best option. Companies such as Unilever, Reckitt Benckiser and AstraZeneca, have proven themselves to be slow and steady investments over the past few decades.
Their global diversification, robust profit margins and substantial competitive advantages have helped them stand out and produce a large return for investors. According to my calculations, a basket of these stocks would have produced an average annual return in the double digits for investors over the past decade.
My calculations also show it would be possible to make a million with a regular investment plan in a Stocks and Shares ISA for just £200 a month. Specifically, my figures show that monthly investment of £200 could grow into a financial nest egg of £1m after 38 years of saving. That’s assuming an average annual rate of return at 10%.
Of course, there’s nothing stopping investors putting more away. Investing £400 a month in a diversified basket of blue-chip stocks could yield a £1m pot within 31 years. By increasing the monthly deposit to £600, it would only take 27 years.
The bottom line
That’s the strategy I’d use to make £1m with a Stocks and Shares ISA. The method could work for any investor as buying a diversified basket of blue-chip stocks may be one of the safest and most straightforward ways to build wealth in the long run.
As most online stockbrokers now offer these products, it’s also incredibly straightforward to set up a regular investment plan and leave it to work its magic.