How I’d invest a £20,000 Stocks and Shares ISA to try and build long-term wealth

Christopher Ruane reckons he could aim for big rewards by investing a £20,000 Stocks and Shares ISA in the right way. Here he shares his thinking.

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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!

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.

C Ruane has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. 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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