The annual deadline for contributions to Stocks and Shares ISAs is less than a week away. But while time may be short to put more money into my ISA in the current year, I think investing it wisely could help me build wealth for many, many years to come.
In fact, if I think about how to use my ISA in the right way and how it could help me build wealth far into the future.
Taking the century-long view
I am a long-term investor but, even so, 100 years seems like a long timeframe for investing. A century ago, the infamous Wall Street crash of 1929 still lay ahead.
However, I reckon that thinking in centuries can sometimes help me an investor even though I will not be here a century from now.
One example is when assessing shares I am thinking of buying, I sometimes ask myself whether the company in question seems likely to be in business a century from now. Is the answer probably, maybe, or probably not?
If I think a company will probably still be around a century from now, it likely has better business characteristics than a firm I think will probably not last for another 100 years.
Obsessive focus on value
Just because a company looks set to last for a long time does not necessarily mean that owning it will boost the value of my Stocks and Shares ISA. Great companies can still make bad investments.
That is because investing is about two things. I need to buy into the right businesses. But the amount of money I make (or lose) also depends on what price I pay for the shares.
Here, the Japanese stock market provides a useful lesson. The Nikkei index hit its all-time high in 1989. Since then it has never reached that level again. In other words, if I had bought a basket of leading Japanese shares in 1989 (including some great companies) I would still be nursing a paper loss.
Buying at the right price is critical. I think Spirax-Sarco, Judges Scientific and Microsoft all have excellent long-term potential. I would happily own them in my Stocks and Shares ISA. But I would not purchase them in today’s market, because the shares are currently too expensive for my tastes.
Building wealth
There are two ways in which I can build wealth, thanks to the shares in my ISA.
One is an increase in share price, while the other is dividends. If I invest wisely, I will hopefully buy shares that offer me both in the long term.
When it comes to dividends, my approach would be to keep them inside my Stocks and Shares ISA. That means I can generate more money to invest. Over the course of decades, this can substantially add up, thanks to the power of dividends compounding.
If dividends compound and shares I own increase in value, my ISA could be worth a lot more in future than the amount I put into it now.
