How would I invest my first £5,000? Well, I could turn it into £87,000 with a Stocks and Shares ISA.
These ISAs are overlooked by many UK investors but they shouldn’t be. With one account, I can access the cash generation machine of the stock market and open up the chance to build a lifelong passive income. Best of all, the superb tax advantages make non-UK investors green with envy.
How can one of these accounts turn £5k into £87k? Let me explain exactly how, but first, I’d like to address the obvious question here. Why don’t more people invest in these ISAs?
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A recent study asked a question to UK savers with £5,000 or more. Would you put the money in a Stocks and Shares ISA? The answer was 70% “wouldn’t consider” it. That’s shocking to me.
Free lunch
The historical returns of the stock market are fantastic. Crunching the numbers, stocks offer much bigger returns than savings accounts or buy-to-lets. And yet seven out of 10 people wouldn’t even give it a moment’s thought.
The problem is risk, specifically the risk of losing money. Growing money with stocks does have challenges. There’s no such thing as a free lunch, and when I invest, I accept more uncertainty for the higher potential rewards.
But I feel the risks appear less scary when understood. Here’s an example.
Worst moment
Everyone knows 2007 was a bad time for stocks. The great financial crisis began and stocks crashed in value. If I’d timed it badly and invested in a FTSE 100 tracker in June 2007, I would have lost half my money by 2009. Ouch.
But let’s say I didn’t all in a panic. I kept my shares so I still owned a part of all those companies. The companies rolled on, sold their products and services, and continued to earn revenues and income the whole time. By 2013, the shares returned to the price I paid for them. My investment is now break even and what happens next is even better.
After 2013, stocks enjoyed a long bull market. My investment would rise and make money even though I invested at the worst moment of the century!
Oh, I’ve received dividend payments throughout too. These payments from my stocks bump the earning power from a Stocks and Shares ISA even further. So, back to my £5,000, what might I expect?
The snowball effect
Well, looking forward, I’d aim for a 10% average return. That’s in line with historical averages although the actual amount will differ wildly from year to year. Over time, this snowballs into huge amounts.
After 30 years of 10% returns, my £5,000 turns into £87,000. If that doesn’t sound right, well, welcome to the surprising power of compound interest. Let’s break down the growth year by year to show how it’s possible.
| Year | Total | Year | Total | Year | Total |
| 1 | £5,500 | 11 | £14,266 | 21 | £37,001 |
| 2 | £6,050 | 12 | £15,692 | 22 | £40,701 |
| 3 | £6,655 | 13 | £17,261 | 23 | £44,772 |
| 4 | £7,321 | 14 | £18,987 | 24 | £49,249 |
| 5 | £8,053 | 15 | £20,886 | 25 | £54,174 |
| 6 | £8,858 | 16 | £22,975 | 26 | £59,591 |
| 7 | £9,744 | 17 | £25,272 | 27 | £65,550 |
| 8 | £10,718 | 18 | £27,800 | 28 | £72,105 |
| 9 | £11,790 | 19 | £30,580 | 29 | £79,315 |
| 10 | £12,969 | 20 | £33,637 | 30 | £87,247 |
These extravagant returns explain why people invest in stocks. They can help me build a sizeable nest egg or work towards big passive income. Either way, it’s why my first £5,000 would go straight into a Stocks and Shares ISA.
