Different people have their own investment objectives when it comes to their Stocks and Shares ISA. As a long-term investor, I think an ISA can be a good vehicle to try and build wealth over the course of years or decades.
If I had £20,000 to put into a Stocks and Shares ISA at the moment, with that goal, here is how I would go about it.
Setting objectives: growth, income, or both
My first move would be to get clear on what I really wanted my ISA to do for me. Simply imagining buying good shares is not an objective in itself.
Rather, I would decide what my focus was. Do I want to zoom in on shares I think could benefit from strong growth of the business in years to come? Should I instead concern myself less with growth and go for some big dividend payers? Or might a balance of growth and income shares make sense for me?
Right now, there are certainly some strong dividend payers even among the ranks of blue-chip FTSE 100 shares. Vodafone announced its latest dividend this week, for example, maintaining its 10.8% yield.
But while I would be happy to have some juicy dividend payers in my Stocks and Shares ISA, I am also keen to tap into some growth opportunities. So as with my current ISA, I would invest in both growth and income shares.
Compounding dividends
If I make the right choices, hopefully the growth shares can increase in value over time.
If my investment thesis about any of them changes at some point, I may sell them and use the proceeds to buy others. At all times, I would maintain a diversified Stocks and Shares ISA.
But what about the income I earn from dividend shares? It could be tempting to take this out of the ISA as I go and use it as a form of passive income.
But with the objective of building wealth, I think it makes more sense to keep the dividends inside the ISA and use them to buy more shares.
That is known as compounding and could be a powerful way to build wealth.
Take that 10.8% dividend yield for example. If I compound £1,000 at 10.8% for a decade, it would be worth almost £2,800. Over two decades that sum would jump to over £7,700 and after three decades, over £21,000!
Compounding can illustrate the value of a long-term approach to investing.
Building wealth from an ISA
What if I compounded the whole £20,000 at 10.8% for three decades? After 30 years, my ISA would be worth over half a million pounds. That would be despite me only having invested £20,000 in it, as well as reinvesting dividends.
A compound annual growth rate of 10.8% is not easy to achieve over a 30-year period, admittedly. But if I can focus on finding the right mixture of high-quality shares at good prices, my Stocks and Shares ISA could put me over halfway towards being a millionaire!
