Like a lot of people, I see my Stocks and Shares ISA as a long-term investment vehicle.
One of the things I think can help when it comes to investing (or indeed any activity) over the long term is to set some objectives.
If I had an empty ISA today and wanted to target a six-figure sum in it a few years down the road, here is the approach I would take.
Start by saving
My first move would be to begin regular contributions to my ISA. With a £20,000 annual allowance, I would aim to put in around £1,667 each month. Over the course of a year, that ought to mean I utilise my maximum allowance.
A lot of people wait until the end of the financial year and put a lump sum into their ISA. But I doubt I will have a spare £20,000 lying around at that stage looking for a use. A regular saving habit could help me build up to the total allowed with a more modest regular contribution.
Investing my ISA
If I did that for five years, I would already have put £100K into my Stocks and Shares ISA.
But if I was simply saving money, I could use a Cash ISA instead. My plan would be to invest the money, meaning I could hopefully hit my £100K target without needing to use that much money of my own.
I could aim to do that either through buying growth shares, income shares, or a combination of both.
Growth shares would be companies like Alphabet or TripAdvisor. If their businesses do well enough over time and the share prices increase, I could end up with an ISA worth £100,000 even though I have only invested, say, £40,000 or £60,000.
I would choose carefully – but also widely. Rather than put everything into one company I thought had promising growth prospects, I would diversify across several as a way of reducing my risk.
Another key consideration is valuation. Some companies have great growth prospects – but their shares already factor this in, so look expensive to me. An example is Judges Scientific, which is why I do not own the share in my portfolio.
An alternative would be to buy income shares and compound (reinvest) the dividends. At the moment, some blue-chip FTSE 100 shares I happily own such as British American Tobacco and Legal & General are yielding over 8%. I think that is attractive.
Long-term approach
If I was able to achieve a compound annual growth rate of 8%, that could already help me increase the value of my Stocks and Shares ISA.
But through a mixture of reinvesting dividends and putting money into compelling growth stories at attractive prices, I could hopefully do better than that.
For example, if I invested £1,667 every month and compounded at 15% annually, I should hit my target of £100,000 in under five years.
This post was originally published on Motley Fool
