Investing in a Stocks and Shares ISA doesn’t need to be complicated. Keeping it simple can also help me achieve my financial goals.
But what does help is a clear target for what I want to achieve. For instance, I’d like an additional income to help provide a comfortable retirement.
To satisfy this aim, let’s consider what I’d need to do.
A long-term Stocks and Shares ISA
First, I should be mindful of how long I’d need to invest for. By investing a relatively modest sum of £250 a month, reaching a five-figure annual income won’t happen overnight.
But if I diligently continue this process consistently for the next 30 years, I’d expect to build a pot worth almost £500,000. Thereafter, by investing in a diversified group of dividend shares, I calculate that I should be able to earn £34,543 in passive income.
A simple strategy
Over the long-term, the average stock market return has been around 10% a year. But bear in mind that investing is rarely a steady path.
Over the past three decades, the FTSE 100 gained by over 20% in four of those years. But in the financial crisis of 2008, it dropped by a whopping 30% in one year.
History shows that one way to benefit from these swings is by pound cost averaging. This is where a fixed amount is invested at regular intervals. That way, if the stock market falls, investors would pick up shares at lower prices.
It avoids trying to time the ups and downs of the market, thus making it a relatively simple strategy for my Stocks and Shares ISA.
Keeping the discipline to continue the systematic investments over many years should prove lucrative and relatively stress-free.
As the well-known investing phrase goes, “time in the market beats timing the market”.
What to invest in?
For a long-term Stocks and Shares ISA, I could invest my £250 a month in a FTSE 100 or S&P 500 index fund. These instruments aim to track the performance of the major stock indices.
Alternatively, I could build a diversified selection of high-quality businesses. To keep it simple, I’d focus on large and established companies that I think will continue to thrive over many years.
It can be tempting to buy the latest hot stock of the day. But I’d resist. Investors should stick to tried and tested methods for a low-stress, simple strategy.
But what makes a high-quality share? Popular investors Warren Buffett and Terry Smith both look for companies that have sustainable competitive advantages. This could be in the form of a strong brand, or long-standing customers.
In addition, I’d also look for a high profit margin and solid balance sheet.
Top of the stocks
Right now, I’d say companies like Diageo, Unilever, Alphabet and Microsoft meet these criteria. And if I had fresh funds to start this plan today, I’d certainly buy these for my ISA.
Looking ahead, once I’m ready to start withdrawing income, I’d switch my strategy to buy a selection of the best dividend shares.
Right now, I’d consider Phoenix Group, British American Tobacco and Legal & General. On average, they offer a 7% dividend yield. But as that could change in the future, I’d need to re-evaluate at the time.
