By leveraging the power of a Stocks and Shares ISA, investors can set themselves on a tremendous wealth-building journey. That’s because any capital gains or dividends earned within this investing vehicle are entirely tax-free. And while investors are restricted to adding an extra £20,000 to work each tax year, that’s more than enough to establish a substantial portfolio. Of course, it all depends on where this money’s invested.
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.
Winners and losers
Let’s say that back in May 2020, an investor managed to buy shares in five of the best-performing FTSE 100 companies: Rolls-Royce, 3i Group, NatWest, International Consolidated Airlines, and Games Workshop. Combined, these companies have delivered a total average return of 430%!
On an annualised basis, that equates to a 39.6% annual return. And investing £20,000 a year at this rate would have grown a Stocks and Shares ISA into a quarter of a million pounds. That’s a massive difference compared to the 11% annualised gain offered by the FTSE 100.
Of course, not every investor has been so fortunate to find the best-performing investments. Some may have been unlucky enough to stumble on some of the worst performers. Those who invested in Ocado, Close Brothers, Vodafone, Croda International, and Schroders are looking at very different results.
These businesses haven’t been so lucky, generating an average annualised loss of 20.9%. And while dividends would have offset some of this impact, investors would have still been left with less money than they initially put in.
This goes to show the double-edged sword that investing is. By making smart moves, a lot of money can be made. But mistakes can also be quite painful.
A future winner?
Sadly, investing never comes with any guarantees. But by zooming in on healthy businesses with expanding cash flows and wide competitive moats, a lot of poor investments can be filtered out. And with that in mind, Melrose Industries (LSE:MRO) currently has my attention. So much so that I recently topped up my position in the company.
The under-the-radar aerospace giant is a critical supplier to the wider civil and defence industries. And while its financials are bogged down with accounting complexities due to an ongoing restructuring, the underlying business appears to be performing admirably.
Management predicts its underlying profits are on track to more than double to £1.2bn by 2029. That puts the forward price-to-earnings ratio at a seemingly cheap 4.9.
Such a valuation certainly suggests the potential for double-digit share price gains if the company can deliver on its targets. Of course, there’s still the risk of a spanner being thrown into the works. The aerospace sector is notoriously cyclical. And a sudden downturn in demand could impede expansion progress. Even if demand remains strong, disruptions in supply chains, even outside of Melrose’s ecosystem, could cause delays should aircraft manufacturers fail to stay on their build schedules.
In other words, there are a lot of things out of management’s control that can go wrong. However, given the discounted valuation and growth potential, that’s a risk I feel is worth taking in my own Stocks and Shares ISA.
