An awful lot of young people would probably baulk at the idea of opening a Stocks and Shares ISA right now. Just being able to cover the rent’s already a significant challenge, thank you very much.
However, a few quick sums shows just how brilliant such a move might be for anyone concerned about setting themselves up for a comfortable middle-age and beyond.
Let’s use an example of a 25-year-old. How much could they have by 2050 in exchange for sacrificing £100 a month beginning today?
Long-term focus
Well, experienced investors would probably say ‘It depends on what they buy’. Others would add that ‘we can’t know the future anyway’. And, of course, they’d be right on both counts. Returns depend on what assets are owned and in what proportion. There’s also nothing to say that past performance will be repeated.
But we can still provide a ballpark figure based on historical data. We know, for example, that returns from stocks and shares — our wealth-building weapon of choice — have returned an average of 7-10% a year over the long term. My point is more to show the opportunity cost of not getting started from an early age.
No experience required
After 25 years at 7%, our now-50-year-old would be sitting on £81,000. If we use 10% instead, we’re talking almost £133,000. Thanks to the ISA wrapper, all of this is free of tax.
Now consider the strong possibility of salary rises as the years pass. If more of this goes into the stock market, the outcome could be even better.
The beautiful thing is that this won’t require any special knowledge or skills — just a cheap exchange-traded fund that tracks thousands of stocks. The real test is being able to completely resist the temptation to meddle, especially when markets crash.
Risk on
Of course, there’s a way of trying to generate even greater returns. That’s to buy and hold shares of individual companies. The snag is that this involves more risk.
Electric vehicle (EV) company Tesla‘s (NASDAQ: TSLA) a great example. Rising inflation and a significant fall in sentiment around tech stocks saw the company’s value tumble in 2022. Despite recovering (and then some), CEO Elon Musk’s decision to begin backing now-President Donald Trump looks to be coming back to bite him. Recently-announced results show a big reduction in sales of his vehicles in Europe as car buyers also grow increasingly wary of the former’s involvement in politics.
But regardless of individual feelings about Musk, it’s impossible to deny that anyone buying into his vision just five years ago will have enjoyed a wonderful payback. The stock has now climbed almost 625% in that period. And when the firm’s involvement in energy storage and robotics are taken into account, there’s an argument for saying there’s a lot more growth to come.
Get moving
Finding the next Tesla in a sea of stocks is easier said than done. Let’s not discount the role of luck either. But a 25-year-old also has more of the greatest commodity going, namely time.
This means they can theoretically endure the rollercoaster ride with far more composure than someone approaching retirement. The key point is to recognise this before it’s too late.
This post was originally published on Motley Fool
