How much could an investment of £250 per month in a Stocks and Shares ISA grow into? Barclays has looked at the UK stock market going back a century and more. And they found average annual returns of 4.9% per year above inflation.
Including inflation at 1.8%, at that rate our £250 per month would grow to more than £42,000 in 10 years. And over 20 years, it would reach almost £125,000. That would certainly be enough incentive to get me started. Opening a Stocks and Shares ISA account isn’t difficult, nor is transferring cash to it. When I first started investing, my first questions were more head-scratching. The problem is, I faced competing objectives.
One was to spread my investments to achieve some degree of diversification. But that means dividing the cash into smaller pots and buying less of each stock. And it increases costs, which is very much a bad thing. A fixed fee of, say, £10 is fine for a £5,000 investment. But it would instantly knock 4% off £250. And that’s not a good way to start a Stocks and Shares ISA.
Stocks and Shares ISA purchases
So with £250 per month, I’d let it accumulate until I’d reached £1,000 and then invest that sum. It would take that £10 charge down to 1%, which is more manageable. But it would also mean having to wait four months to make my first investment. I was keen when I started and wanted to begin checking my share prices as quickly as I could, but it’s an impulse I managed to hold off.
Only making a purchase every four months also means diversification would take a lot longer. I’ve never been very good at diversification anyway, and I’ve always had trouble deciding on more than a handful of shares I want to own. But if starting now, with a fresh Stocks and Shares ISA in 2021, I’d do something different. I’d start with investment trusts.
Buying shares in an investment trust gets me part ownership of the trust’s assets. And the trust typically puts those assets into a wide range of investments. For example, I currently hold shares in City of London Investment Trust, which invests in a range of top FTSE 100 shares. So I get instant diversification through only one investment, and without having to pay multiple fees.
Minimising risk
Now, there’s still risk here, and any single investment can go bad. Just ask anyone who invested in Neil Woodford’s investment trust a few years ago and lost a packet. So to minimise my risk, I’d go for investment trusts that make it onto the Association of Investment Companies’ list of Dividend Heroes. Those are investment trusts that have raised their dividends every year for at least 20 years. City of London has managed 54 straight years now.
So, starting a new Stocks and Shares ISA in 2021, I think that’s what I’d do. Every time I’d accumulated £1,000 I’d buy one of the investment trusts from that Dividend Heroes list, ending the year with four of them. And then next year, I’d probably start adding individual company stocks.