Since 2019-20, the average Stocks and Shares ISA has generated an annual return of 6.19%. That’s according to Moneyfacts.co.uk.
Investing £100 a month at that rate over five years would result in an investment worth £7,117. That might not sound like much, but things look very different from a long-term perspective.
Long-term investing
Over the last five years, keeping money in cash has generated a return of around 2% a year. That’s enough to turn £100 a month in savings into £6,412.
That’s not a huge amount less than the average Stocks and Shares ISA. And given the safer nature of cash, the inherent risks associated with equities might not seem to be worth the rewards.
Over the long term, however, there’s a big difference between earning 6.19% a year and earning 2%. And this is what anyone thinking about the stock market need to focus on.
An investor who earns a 6.19% annual return for 30 years turns £100 a month into £101,492. By contrast, someone who achieves 2% a year turns £100 a month into £49,309 in the same timeframe.
Regular investing
The obvious issue with the stock market compared to cash is that it can be volatile. The value of a monthly investment of £100 over the last five years will have fluctuated a lot in that time.
It’s an open secret that nobody knows what share prices are going to do in the short term. Even if some have been falling recently, there’s nothing to say they can’t continue to drop – or vice versa.
That makes working out the best (or worst) time to buy shares nearly impossible. But there’s a straightforward way out of this problem for investors with a long-term approach.
The solution is to invest regularly and often. Buying shares each month increases the chance of buying at the right time and returns should be good as long as the stock market goes up over time.
An example
Bunzl (LSE:BNZL) is a stock I’ve been buying in my Stocks and Shares ISA recently. The share price is down 31% since the start of the year, and it could fall further.
The FTSE 100 distribution company has been struggling with operational issues recently. And the risk of a recession – which I think is still high – could create problems in the near future.
But I also believe that the company has some key long-term strengths. These include its scale, which allows it to get products to customers more quickly and reliably than its rivals.
Bunzl also has an excellent record of acquiring other businesses, which boosts its sales and reinforces its competitive position. And in a fragmented market, I expect this to continue.
The most important thing
In my view, the most important thing when it comes to investing isn’t working out when share prices are at their cheapest. Even Warren Buffett doesn’t claim to be able to do this.
What matters much more is being able to identify strong businesses. And this is something I think I have with Bunzl, whether the stock goes up, down, or sideways from here.
Investing regularly in high-quality companies is – as I see it – the best strategy for success. So this is what I’m looking to do each month in my Stocks and Shares ISA.
