It’s the beginning of April which means one thing for Stocks and Shares ISA investors, deadline time! That’s on Wednesday, with Thursday the start of the new ISA year.
Each year, the £20k contribution limit resets, meaning I can start putting more money in my pot to invest going forward. If I was just starting out this year, here’s how I’d go about investing to try and accumulate a tasty retirement fund.
Having realistic expectations
I’m talking about growing a £500k fund for retirement. Some might wonder why not aim to make that kind of money in just a few years instead? Of course, I’d love to do this. But I have some clear limitations. To begin with, I can invest a maximum of £20k per year in my ISA. That in itself is a generous figure, so depending on my cash flow I might not even be able to invest that much.
Another restriction on reaching my goal is the realistic size of my returns. If I look at the FTSE 100 total return index over the past decade, it has risen by 75%.
A 7.5% average annual return is what I could use as a barometer going forward. Granted, things get a little more complicated when I factor in compounding of returns. But the main point I’m trying to make here is that I should be using around 7.5% as a guide, not something overly ambitious such as 10%, or 15%.
Putting both the financial cap and the expected returns together, it’s going to take me 14 years in the best-case scenario. This assumes I can invest the full £20k each year.
My four-step game plan
My actual plan when it comes to investing can be split into just a few steps. Firstly, I’ll make sure I put some cash away regularly each month that’s ready to be invested. I don’t have to be prescriptive on buying stocks on the first day of every month. I can be flexible as long as I have the cash there and buy when I see good opportunities.
The second step is keeping alert to the potential opportunities. If I do step one but not step two, it’s pointless. Good options can arise after sharp moves following company earnings, Bank of England meetings, data releases, and other market-moving events.
Thirdly, I want to diversify my ISA holdings via buying stocks from different sectors. This becomes more applicable over time as my portfolio grows. If I get to the stage where the value is £300k or £400k, I don’t want to have all of it just in mining stocks or bank shares!
Finally, I need to move with the times. I might invest in a hot stock right now, but in five years time it might make more sense to put some fresh money into a different company. Being flexible in my opinion of what’s a good stock to buy is the hallmark of a profitable long-term investor.
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This post was originally published on Motley Fool
