Why do we invest for the long term? For most of us, it’s to set up passive income for when we get a bit older, right?
I put my spare cash in a Stocks and Shares ISA. Looking at the long-term performance of the UK stock market, it’s beaten other forms of investment for well over a century.
There’s no tax on ISA gains, which is a bonus. But it brings me to a mistake to avoid.
Don’t focus on tax
A friend once told me he had a Cash ISA and liked not paying tax on it. He had no idea what interest he was getting though.
I asked him to check, and it turned out it was a pitiful rate. And there were savings accounts out there that paid better interest, even after tax.
So that’s something I learned early. The old saying ‘don’t let the tax tail wag the investment dog’ is spot on.
It’s almost always better to pay tax on a superior investment than not pay tax on an inferior one.
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.
Even without the tax benefit, I don’t think a Cash ISA has much to offer a long-term investor anyway. Some now offer better rates, but they’re still below inflation.
An account that pays less than inflation will simply lose money in real terms, although I can’t ignore the fact that the returns are guaranteed. This isn’t the case with shares.
Don’t try to get rich quick
There’s an investing story doing the rounds now making big claims. It talks about a small UK-listed stock that it says will soar by 500%. Or 1,000%. It depends on which version we read.
It’s been pushed on social media sites, been re-forwarded and re-tweeted. And you know what? The stock has rocketed since the story broke.
Anyone who held some shares before the craze broke could have sold and made a big pile in a week or so. But those buying into the hype after the price has soared?
Well, I’ve seen ‘pump and dump’ scams a good few times before. And I don’t hold out much hope of success. A very similar one last year, for example, crashed and burned.
So I’d say avoid anything that looks too good, especially if it promises short-term wealth.
Don’t follow the crowds
To follow on from that, more generally I try to avoid doing what the crowds are doing.
When times are tough, like we saw in the pandemic and stock market crashes… people sell shares. When times are good and stock markets are booming… people buy shares.
Isn’t that the wrong way round? Don’t we want to buy shares when they’re low and sell when they’re high? I know I do.
So for me, I reckon the best way to build a passive income for later in life is to buy UK shares and hold for the long-term. I go for stable, big companies in the FTSE 100, paying good dividends.
And then I switch off from what the markets are doing, and what the crowds are shouting.
