Drip-feeding money into investments with a Stocks and Shares ISA is a proven wealth-building strategy. The technical term for this approach is pound cost averaging. And by using a tax-efficient investing account, more profits end up in my pocket rather than lining the coffers of the British treasury.
Let’s explore how this method works.
Investing with a Stocks and Shares ISA
A commonly forgotten expense when investing in the stock market is taxes. Typically, any profits from capital gains or dividends are subject to taxes at the end of each year. But thanks to the creation of the Stocks and Shares ISA, I can bypass this expense entirely.
As a quick reminder, this account allows me to deposit up to £20,000 each year which can then be invested into both UK and international shares. It’s effectively a bog-standard trading account. But the key difference is that any returns and dividends are tax-free!
Similarly, it pairs quite well with deploying a ‘pound cost averaging’ investing approach. Most brokers offer a regular trading plan, where I can consistently invest in a business monthly at a reduced commission rate. This not only means more of my money gets put to work but also puts my investments on autopilot.
Investing to reach millionaire status
Creating an investment account is the easy part. Finding the best UK shares to buy is where the real challenge lies. There are countless weird and wonderful companies out there to choose from. Yet many won’t deliver on expectations and can lead to significant losses in my portfolio if I’m not prudent in my stock-picking methodology.
In my experience, the firms that generate the best returns in the long run, are those with proven business models, strong financials, smart management, and plenty of competitive advantages. But finding such companies is often easier said than done. That’s why many investors choose to invest using funds.
Investing in a fund passes on the stock-picking part of investing to an experienced professional. This is certainly possible with a Stocks and Shares ISA. Yet fund managers often fail to deliver market-beating returns after management fees are deducted. That’s why low-cost index trackers are a popular alternative. These are certainly cheaper but, by design, can’t deliver market-beating returns.
Slow and steady
The FTSE 100 has yielded an average annual return of around 8%, with dividends reinvested. If I were to drip-feed £300 each month into an index tracker at this rate, it would take approximately 40 years to enter millionaire territory.
That’s a nice nest egg to retire on. But four decades is a long time. That’s why I prefer to pick stocks directly. There’s no denying that this approach comes with higher risk and requires far more dedication to research and analysis. Plus returns are never guaranteed, of course.
However, it opens the door to market-beating performance. If my stock-picking strategy can deliver a 10% return, I might reach a million six years faster!
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.