Opening a Stocks and Shares ISA‘s one of the smartest things any new investor should consider doing, in my humble opinion. Even small amounts put to work on a regular basis can generate a massive pot of wealth over time.
To illustrate this, I’ll show how a 30-year-old with no previous experience can build a good nest egg for retirement by investing £100 every month from today.
Keeping it simple (for now)
Let’s say our investor doesn’t want to become the next stock-picking whizz like Warren Buffett. They just want to see their money grow over time. One option would be to buy a global index tracker. This spreads the holder’s money across thousands of stocks around the world.
One very popular example is the Vanguard FTSE Global All Cap Index Fund. It owns a huge number of stocks of all sizes in both developed and emerging markets.
The beauty of this approach is that is requires only a few mouse clicks to set up. And if the Vanguard fund is held within an ISA, no tax will be due.
Trackers like the example above also tend to have low management fees because everything is handled by computers rather than an expensive-but-fallible human. This is ideal because costs really begin to eat into returns when someone’s investing for decades.
Transformational wealth
Speaking of returns, let’s look at how much an investor could have by the time they reach UK State Pension age. Since the rules will likely change, we’ll need to guess. I’ve gone for 70 years’ old.
Now, the average annual return of global equities is between 7% and 10%. Let’s be cautious and take the lower percentage for what our investor maybe achieves over 40 years.
Investing £100 a month would give almost £266,000 to enjoy in retirement.
A few things to note
Naturally, we can’t know the future, especially when it’s 40 years from now! And inflation will make this sum look significantly less tidy by then.
Investing can also also be a wild ride. Since share prices yo-yo all the time, so too will the value of any portfolio. As an example, the Vanguard tracker mentioned above rose 22% in 2024. In 2022, it fell almost 5%.
But I reckon building a nest egg’s still an incredibly sensible thing to do (some think the State Pension may not even exist in 2065). And as long as an investor can refrain from meddling, the long-term returns should be worth any temporary pain. Evidence shows that stocks have consistently delivered higher gains compared to assets like gold, bonds and cash.
Just get started
Obviously, taking a back seat’s easier said than done. Watching out for threats to our welfare or wealth is all part of being human.
But this is why I believe those just starting out should consider buying a single index fund until they feel comfortable buying individual stocks (if they ever want to).
They may also want to focus on putting more than £100 to work every month, thereby allowing more cash to compound over time.
iAs with a lot of things in life, the best time to do something was yesterday. The second best time is now.
