Recession risks are rising, borrowing costs are soaring and investors are nervous amid market turmoil. So why should I invest in a Stocks and Shares ISA right now?
Times of crisis can often create opportunities. Share prices can fall in the short term due to temporary factors. But as a long-term investor, I can somewhat ignore near-term price swings.
Timing the market and trying to buy at the bottom is notoriously difficult. One of the golden rules of long-term investing is said to be, “time in the market beats timing the market”.
It suggests that investing consistently for many years should give a better return than selling in times of crisis with the hoping of buying back later.
If I had the spare cash and wanted to start investing in a Stocks and Shares ISA today, here’s what I’d do.
Aiming for a £1m Stocks and Shares ISA
First, I’d invest consistently and regularly. That way, even if share prices fall in the near term, I can rest assured that my automated plan is picking up cheap shares.
History shows that over long periods, average stock market returns have been around 8%-10% a year. Although future returns aren’t guaranteed, I’d use this figure as an estimate.
I’d like to aim for a £1m Stocks and Shares ISA. But to do so, I’d need to invest for many years. I calculate that if I invest £350 every month for 35 years, I could have a pot worth around £1.1m.
What to invest in?
I could invest in a FTSE 100 or S&P500 index fund. They would track the largest UK and US stocks.
Alternatively, I could pick and choose my own shares. Many have achieved a far greater than average return over the years.
With some reading and research, I’d look for shares that could perform well over the coming years and decades.
More specifically, I’d look for high-quality businesses that offer strong profit margins and a solid competitive advantage. This could be in the form of patents, customer relationships or a brand.
I’d look for a double-digit return on capital employed. That’s a key measure of a quality business, in my opinion. It demonstrates how efficiently a company uses its capital.
Next, I’d like to own a mixture of stocks that span growth, value, and income. Over time, one category might perform better than another. For instance, this year, value stocks have performed far better than growth stocks. But that won’t always be the case.
Top picks
Right now, the FTSE 100 includes several of the shares that I’d buy if I had £350 a month to add to my ISA. These include analytics business RELX, equipment rental company Ashtead, and defence leader BAE Systems.
On average, these three shares offer a return on capital employed of 16%, and a tasty 20% profit margin. Their performances over the past decade have been remarkable. If I’d bought all three shares exactly 10 years ago, I’d have achieved a return of 19% a year.
Although the result could be very different over the coming decades, if I can consistently find such gems, I could potentially achieve my £1m goal much earlier than planned.