We all love the idea of making instant riches on the stock market with a shrewd lump sum net. But the reality is very different, as a patient approach is proven to be the most successful way to generate wealth and a large second income.
Even a £500 monthly investment in a tax-efficient Stocks and Shares ISA may be enough to deliver a comfortable standard of living in retirement. Here’s how.
Using an ISA
The use of a Stocks and Shares ISA from Day One is a powerful weapon in any UK investor’s arsenal.
These products allow Britons to save or invest up to £20,000 every year without having to pay a penny in tax on capital gains or dividend income. For long-term investors, this can add up to tens or even hundreds of thousands of pounds.
The benefit to investors is twofold. Not only are the cash savings significant in their own right. The money that’s shielded from HM Revenue and Customs can be used to supercharge portfolio growth through the mathematical miracle that’s compounding.
This has allowed the average Stocks and Shares ISA investor to enjoy an average annual return of 9.6% over the last decade.
If this were to continue (which it may not), a £500 monthly investment for 30 years would give someone a retirement pot of £1,047,026. This could then provide a £62,822 annual second income if invested in a range of dividend shares with 6% yields.
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.
A robust portfolio
With a Stocks and Shares ISA, investors have a wide choice of shares, investment trusts, funds and other securities to choose from. So it can pay to make the most of this opportunity and consider building a diversified portfolio that reduces risk and provides a stable return across the economic cycle.
A portfolio of 10-15 shares could be a good way to go. Here’s an example of what a portfolio of FTSE 100 and FTSE 250 shares may look like:
| Stock | Sector | Type Of Share |
|---|---|---|
| National Grid | Utilities | Dividend |
| Pets at Home | Retail | Growth |
| QinetiQ | Defence | Value |
| Rolls-Royce | Industrials | Growth |
| Lion Finance | Banking | Value |
| Rio Tinto | Mining | Dividend |
| AstraZeneca | Pharmaceuticals | Growth |
| Standard Chartered | Banking | Value |
| Safestore | Real estate | Dividend |
| Games Workshop (LSE:GAW) | Leisure | Growth |
| Aviva | Financial services | Dividend |
| JD Sports | Retail | Value |
This diversified portfolio provides exposure to both cyclical and defensive shares, along with an equal weighting of growth, value and dividend stocks.
Income stocks can provide a healthy flow of dividends over time, giving portfolio stability. Meanwhile, growth and value shares often deliver substantial long-term capital appreciation.
Games Workshop is a company I hold in my Stocks and Shares ISA. In fact, it’s excellent record of earnings growth makes it one of my favourite and largest holdings.
Thanks to an explosion in the tabletop gaming sector, annual pre-tax profit has grown at an average rate of roughly 32% over the last decade. That’s despite the problem of growing competition and the emergence of 3D printing.
Games Workshop isn’t just riding the coattails of this booming hobby. It’s propelled the hobby into the mainstream thanks to trailblazing games systems like Warhammer 40k.
And with the business accelerating the licencing of its IP — including through a blockbuster film and TV deal with Amazon — earnings growth could move to the next level.
