Now’s a great time to go shopping for quality UK stocks at knockdown prices. Years of underperformance mean that both the FTSE 100 and FTSE 250 indices are packed with great, cheap shares.
With a tax-efficient Stocks and Shares ISA, I can invest up to £20,000 a year in equities, funds and other financial instruments. It can allow me to save a fortune in tax payments over time.
As I’ll show here, one of these products could help me eventually go from having zero wealth to a huge lump sum above £535,000 in just a couple of decades.
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Splitting my investment
As I say, buying stocks this August is an attractive idea, given their current cheapness. But I wouldn’t just invest all of my money in equities today. I’d look to put my capital in higher-risk assets like stocks alongside low-risk ones such as savings accounts.
This helps to spread my risk and provide a smooth return over the entire economic cycle. Fortunately, I can hit both of these goals with the ISA range of products.
As its name suggests, the Cash ISA acts like a bog-standard savings account, but with the added bonus of tax efficiency. The Stocks and Shares ISA, meanwhile, lets me target a higher return with riskier products.
How much I put in each ISA would depend on my own investment goals and attitude to risk. There’s no set formula, but one strategy could be to invest 80% in shares and 20% in cash each year.
High returns
With this established, I’d then need to choose which stocks to buy. My priority would be to select cheap shares, as these can boost my chances of making above-average returns.
The idea is that value stocks often deliver market-beating capital appreciation when the market eventually wises up to their cheapness.
My next step would be to buy a mix of FTSE 100 and FTSE 250 shares. The average long-term return for these indices stands at 9.3%. It’s the sort of figure that could turn my ISA from £0 into more than £500k in a couple of decades.
With me getting a 5% interest rate on my Cash ISA, a £10,000 annual investment spread 80% in cheap stocks like this, and 20% in cash savings could, after 20 years, turn into £535,823.
| ISA | Monthly investment | Growth rate | Total |
|---|---|---|---|
| Stocks and Shares ISA | £666.67 | 9.3% | £466,864.14 |
| Cash ISA | £166.67 | 5% | £68,959.10 |
One FTSE 100 bargain
Phoenix Group Holdings (LSE:PHNX) is one such company I feel is massively undervalued right now.
City analysts expect annual earnings here to soar 43% in 2024. This leaves the Footsie firm trading on a price-to-earnings growth (PEG) ratio of 0.4. A reminder that any reading below 1 indicates that a share is undervalued.
On top of this, Phoenix Group shares currently carry a huge 9.9% forward dividend yield.
This is a company with considerable long-term potential. On one hand, the financial services sector’s hugely competitive, meaning Phoenix has to paddle extremely hard to succeed. A sustained property market downturn could also harm the firm’s mortgage book.
But its excellent brand power and cash-rich balance sheet makes it a formidable player in its own right. And with demographic changes driving demand for savings and retirement products, it has an excellent chance to increase revenues in the coming decades.
