My Stocks and Shares ISA is one of the provisions that allows me to protect my stock market gains from tax. It lets me invest £20k each year in the market and bank any profit or dividends without then owing anything to HMRC. If I was starting from scratch with a £20k allowance this year, here’s how I’d try to build it to seven figures.
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Diversifying for the long run
Given that I’m several decades away from retirement, my focus is on investing mostly in growth stocks. This is because in the long run, the returns should be greater than buying value stocks or more mature companies. If I look at where the big US tech stocks were trading a decade ago, the growth in their share prices is exceptional.
The risk is that it’s difficult to pick winners. It’s easy to sit with hindsight and say that I would have bought Nvidia shares a decade ago, but the fact is I didn’t. Further, for every one stock that booms, there’s another that goes bankrupt. So the return might be high, but the risk is too.
To try and get my ISA to £1m, there are a couple of things I can do. One is that I can diversify my risk by investing in a host of different stocks. Even if some don’t perform that well but one takes off, the gains will more than compensate for the others.
The other point for my strategy is to focus on the sectors of the future. Renewable energy, artificial intelligence (AI) and electric vehicles (EV) are just a few examples of where I think demand should rise going forward. Picking ideas from these areas should give me a better chance of making a profit.
A stock for now (and the future)
As an example of a stock I’d look to include, Tesla (NASDAQ:TSLA) jumps to mind. The share price is down 31% over the past year. I don’t see this as a bad thing, given that I thought it was quite overvalued.
I think the EV giant is a perfect example of the type of stock for my long-term ISA strategy. It has a dominant position in the sector. There’s large growth potential in coming years. Some 18% of total cars sold last year were EVs, up from 14% in 2022. It’s increasing but still has a long way to run.
Therefore, I expect the share price to rally in coming years as it continues to grow revenue and profits.
Some will flag up the fall in the stock recently and say that competitors are eating away at market share. This is a risk, but again, let’s look at the big picture. I’m not aiming to buy and sell the stock over one year. I want to hold it for a decade. Over the past five years, the stock is up 1,137%. The fall in the past year is a drop in the ocean.
I’d expect to be able to achieve a 9% average annual growth rate, although this isn’t guaranteed and I could undershoot that. But if I started investing now from zero and used my £20k limit each year, my pot could grow to be over £1m by year 19.
This post was originally published on Motley Fool
