If a 40-year-old put £500 a month in a Stocks & Shares ISA, here’s what they could have by retirement

Late to investing? Don’t worry. Here’s how a regular long-term investment in a Stocks and Shares ISA could generate huge returns.

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The Stocks and Shares ISA is a great product for helping UK investors to prepare for retirement. With a generous £20,000 annual contribution allowance, they can supercharge an individual’s ability to build long-term wealth by saving a fortune in tax.

But investors don’t need to max out their allowance to make enough to retire comfortably. By investing shrewdly, an individual has a chance to build a huge pension pot with as little as £6,000 a year by drip feeding cash.

Here’s how even a 40-year-old starting from zero could build a large pension pot with a £500 regular monthly investment.

Should you invest £1,000 in BT right now?

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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.

Reducing risk

Investing in a Stocks and Shares ISA is undoubtedly riskier than simply parking one’s money in a Cash ISA. Stock markets can be volatile and returns can fluctuate wildly from year to year.

However, share investors have a variety of shares, funds, and trusts they can choose from to manage the amount of risk they take on. One way to do this is to build a broad portfolio consisting of FTSE 100, FTSE 250, and S&P 500 shares.

One tactic could be owning between 10 and 15 different shares spanning various sectors. More risk-averse individuals could spread the risk further by buying one or more exchange-traded funds (ETFs) that invest in a basket of shares.

Moreover, building a portfolio of large- and mid-cap UK and US shares helps investors reduce risk through geographical diversification.

… while still building big returns

The good news is that diversifying to manage risk needn’t harm an investor’s ability to build wealth. And especially over the long term as the impact of temporary market volatility is gradually smoothed out.

In recent decades, the FTSE 100 has delivered an average annual return of 7%. The FTSE 250’s provided a return of 11% over the same timeframe. Leading the pack, the S&P 500’s delivered a 13% average return per year.

While past performance is not a guarantee of future returns, I think an average annual return of 9% is quite possible going forwards, based on these figures. And for a 40-year-old starting out, this could create transformational wealth by retirement.

With dividends reinvested, a £500 monthly investment in a Stocks and Shares ISA would create a pension pot of £754,151 by the time they reach the State Pension age of 68.

Source: TradingView

Starting out

There are many top UK and US shares investors can buy to achieve these returns. Those starting their journey may want to consider an investment trust like the Polar Capital Technology Trust (LSE:PCT) instead.

Created with Highcharts 11.4.3Polar Capital Technology Trust Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

Products like this provide instant diversification while keeping trading costs at a minimum. In this case, investors spread their capital across 102 companies spanning the US, Europe, and Asia.

On the downside, a narrow focus on technology stocks like Nvidia, Microsoft, and Taiwan Semiconductor Manufacturing Company can lead to disappointing returns during economic downturns.

However, the long-term returns could also be considerable. This is because it provides exposure to myriad fast-growing technologies like artificial intelligence (AI), robotics, and the Internet of Things (IoT).

This is illustrated by the trust’s exceptional average annual return of 19.4% since 2014. If this performance continues, investment here could help an individual build that huge Stocks and Shares ISA even sooner.

Should you buy BT shares today?

Before you decide, please take a moment to review this first.

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Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

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That’s why now could be an ideal time to secure this valuable investment research.

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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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Microsoft, Nvidia, and Taiwan Semiconductor Manufacturing. 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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