Forget buy-to-let! I’d aim for a million with a Stocks and Shares ISA instead

Using a Stocks and Shares ISA to make a million could be a more prudent approach than buy-to-let. Zaven Boyrazian explains how.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

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The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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The Stocks and Shares ISA gives British investors a distinct advantage over rental real estate moguls. Buy-to-let continues to be a proven and popular method of building wealth. However, the increasingly hostile tax environment is slowing the process. Meanwhile, rising interest rates aren’t helping profit margins now that mortgages are getting more expensive.

By comparison, investing in shares has significantly lower barriers to entry. And by using an ISA, tax considerations can be completely eliminated from the equation. What’s more, in the long run, investing as little as £500 a month is enough to reach millionaire territory. Let’s explore how.

Making a million?

Over long periods, the stock market has historically trended up. Why? Because stocks ultimately represent businesses which seek to expand and deliver growth. Of course, not every enterprise is successful. But for those that make it into the FTSE 250, the risk of failing is significantly lower than those in penny stock territory.

That’s arguably why the growth index has delivered average annual total returns of 10.6% since its inception in 1992. And with a strategy as simple as autopilot investing in an index fund, investors can tap into this opportunity with their Stocks and Shares ISA. Even starting from scratch, injecting £500 monthly at this rate of return would build a million-pound portfolio within 28 years.

Obviously, that is a long time. But the process can be accelerated. Let’s say an investor earns sufficient income to spare £1,000 a month for their portfolio. In that case, reaching a million with a FTSE 250 index tracker could only take 22 years.

But the process can be shortened even more by picking individual stocks. A carefully constructed portfolio containing high-quality enterprises bought at sensible prices can often deliver market-beating returns. Even if it only outperforms by 2%, that’s enough to wipe out another two years from the waiting time.

Nothing is risk-free

Unlike real estate, the stock market is considerably more volatile. As 2022 kindly reminded everyone, stocks don’t always go up. Crashes and corrections occasionally rear their ugly heads and can substantially set investors back along their wealth-building journey.

The FTSE 250 dropped by as much as 30% last year and has yet to recover to fully recover. Therefore, as exciting as the prospect of becoming an ISA millionaire with an index fund sounds, the process could take significantly longer than expected.

The risks are only amplified for individual stock pickers. Achieving a 12.6% annualised return requires considerable skill and emotional discipline that many individuals lack. After all, it’s not easy to keep a cool head when shares in a portfolio are all seemingly in a free-fall for no apparent reason. And even the best Stocks and Shares ISA portfolios can destroy wealth if improperly managed.

Investing has its risks. But given the potential rewards for patient investors, it’s a pursuit worth taking. At least, that’s what I think.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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