An investor opening a Stocks and Shares ISA before the 5 April deadline has a golden opportunity to supercharge their wealth, harnessing the power of tax-free compounding. With platforms like Hargreaves Lansdown and AJ Bell, setting up an ISA is quick, and funding it before the tax year ends ensures that some, or all, of the £20,000 annual allowance is put to work. Once the clock strikes midnight on 5 April, any unused portion is gone for good.
How to get going
Growing a portfolio is all about smart choices and patience. Novice investors are often advised to pick a mix of global equities, index funds, and investment trusts spreads risk while capturing market gains. More experienced investors may prefer to invest in individual stocks. This is a riskier approach, but a diverse portfolio of well-chosen stocks can growth much faster than the index average. It quite simply pays to undertake thorough research and avoid common pitfalls like throwing good money after bad and emotional investing.
The magic happens with compounding. This is when we invest in companies that reinvest earnings for us — like growth-oriented tech stocks — and reinvest dividends ourselves. This leads to steady capital appreciation, which snowballs over time, turning modest investments into serious wealth.
Dream big, it’s achievable
Hitting the £1m mark isn’t just a dream. It’s maths. With an average 7% return, a portfolio could double every 10 years. Using this formula, maxing out the ISA allowance each year puts millionaire status well within reach in under 25 years. More experienced investors may be able to achieve double-digit returns when averaged over the long run. In fact, 10% returns would mean hitting millionaire status in just 19 years. However, those of us making smaller contributions can get there too. It’ll just take a little longer. Thankfully, our investment will grow faster over time — that’s compounding.
The real edge? No tax, ever. Unlike regular investment accounts, an ISA shields every gain and dividend from tax, letting the full force of growth and reinvestment work without interference.
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.
The practical bit
Market dips become buying opportunities, while diversification across sectors and regions provides stability. One investment that delivers both diversification and growth potential is The Monks Investment Trust (LSE:MNKS). This trust aims for long-term capital growth by investing globally in a diverse portfolio of quoted equities. The Monks team emphasises investing in adaptable companies that can navigate changing market conditions, spreading investments across four growth categories: Stalwart, Rapid, Cyclical, and Latent.
Monks’ top holdings include tech giants like Meta Platforms, Amazon, and Microsoft, with a significant allocation to US stocks. It’s actually a very diversified portfolio with the top five holdings accounting for just less than 20% — I’ve seen that figure much higher in other trusts. This diversification strategy has helped the trust deliver strong returns, outpacing its benchmark index in recent periods.
However, investors should be aware of the trust’s use of gearing, which stood at 4.96% as of the latest data. While gearing can amplify gains in favourable market conditions, it can also increase losses during downturns, potentially leading to higher volatility in the trust’s performance and share price.
Despite this gearing, it’s a stock that interests me a lot. In fact, it’s one I’ve added to my daughter’s SIPP.
This post was originally published on Motley Fool
