Forget buy-to-let! Start building to £1m with a Stocks and Shares ISA

Investing in a Stocks and Shares ISA could be a far more prudent method to build a seven-figure portfolio than becoming a landlord. Here’s why.

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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 tax advantages of a Stocks and Shares ISA are becoming increasingly valuable. With the latest government budget almost eradicating dividend and capital gains allowances, investing outside a tax-efficient account is becoming increasingly expensive. And that’s an especially unwelcome sight given the ongoing cost-of-living crisis.

This is where British investors have a significant advantage over buy-to-let landlords. Being a member of the latter group can still be immensely profitable. But it’s becoming increasingly challenging in the face of falling house prices and higher taxes on any rental profits.

Therefore, in 2023, I believe it’s far more lucrative to be a stock market investor capitalising on the benefits of an ISA. It could even result in building a £1m portfolio.

Making a million in the stock market

Investing in equities has a reputation for being risky. And given all the chaos endured in 2022, it’s not hard to see why. But when zooming out over the course of decades, an interesting trend emerges – the stock market goes up.

Why? Because at the end of the day, each stock has a business underneath it. And the businesses which succeed often wipe out any losses incurred by the ones that fail. That’s why the FTSE 250 index has historically delivered an average 10.6% return, despite some of its once-largest constituents like Cineworld tumbling into bankruptcy.

As it turns out, this rate of return is more than enough for patient investors to build a seven-figure portfolio in the long run. In fact, investing just £500 a month at this rate of return would yield a seven-figure Stocks and Shares ISA in under 28 years. That’s roughly only two-thirds of the average time spent in a career. And for those living a more modest lifestyle, it could be sufficient to retire early.

Having said that, 28 years is still a very long time, even for a patient individual. So is there any way to accelerate this process? Yes. It’s called stock picking.

Instead of tracking an index, investors can choose to invest in a specific collection of businesses to pursue higher returns. This requires significantly more time, knowledge, and dedication. But even if a portfolio generates just an extra 3% each year, that’s enough to wipe out almost five years from the waiting time!

Risk vs reward

As exciting as the concept is to build a £1m Stocks and Shares ISA, it’s important to stress nothing in the world of investing is guaranteed. Just because the FTSE 250 has yielded an average 10.6% return in the past, it doesn’t mean it will continue to do so in the future.

The risks are only amplified when it comes to stock picking. Successfully identifying the best shares to buy is a challenge in itself. But remaining calm and emotionally disciplined during times of volatility is even harder. And it’s usually the latter that’s responsible for most stock pickers (even professionals) failing to generate a positive return, let alone beat the market.

Nevertheless, patient investors can leverage the compounding returns of stocks to increase their wealth. And while it’s impossible to completely eliminate risk, taking a disciplined approach can help mitigate it on the path to a larger Stocks and Shares ISA.

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.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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