Is there a better way to make long-term cash than to invest in a Stocks and Shares ISA? For me, the answer is no. These tax-efficient products have proved one of the smartest ways to build wealth, having delivered an average annual return above 9%.
Sure, stock markets can be volatile at times. But over time, few asset classes have provided the brilliant and reliable returns of global shares. Consider the wise words of billionaire investor Warren Buffett. The now-retired Berkshire Hathaway CEO famously pointed out that
in the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
Have £500 to invest each month? Here’s how ISA investors could target a comfortable lifestyle in retirement.
Building wealth, limiting risk
With the Stocks and Shares ISA, individuals are protected from all sorts of tax. It’s the same with the Cash ISA. As a result, people have a better chance of building wealth before retirement with these wrappers, as they end up with more cash to invest and compound over time. And once retired, they don’t have to pay a penny in income tax when they draw down money.
Add in the high long-term performance of the stock market, and these products can generate truly life-changing returns.
Since 2015, the average Stocks and Shares ISA holder has enjoyed an average yearly return of 9.64%, according to Moneyfacts. For Cash ISA savers, the figure sits way back at 1.21%. I think a blend of both could be a great way to balance chasing large returns with limiting risk.
A £70k passive income
Let’s say an investor has £500 left over at the end of each month. They choose to split that 80-20, with the former used to buy shares and the rest held in cash.
We’ll also say they can achieve the returns ISA investors have enjoyed over the last decade. After 30 years, they would have £880,996 to retire on.
If then invested in 8%-yielding dividend shares, they’d enjoy a juicy £70,479 annual passive income.
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 world of opportunity
What I also love about the Stocks and Shares ISA is its versatility. With these products, investors can hold a wide range of shares, trusts, and funds to help them diversify, providing protection from risk and unlocking many growth and income opportunities.
Alliance Witan (LSE:ALW) is a top investment trust to consider in an ISA, in my view. It might be listed on the FTSE 100, but it holds a diversified portfolio of global stocks (224 to be exact). These include high-growth US tech stocks like Nvidia, Microsoft, and Apple alongside miners, banks, drugmakers, and other shares from across the world.
The trust has risen 157% in value over the past 10 years. It has also kept growing a dividend that has risen every year since the late 1960s. As a consequence, it has produced an average yearly return of 11.4% since 2015. That’s better than the 9.64% that the typical ISA investor has enjoyed!
Alliance Witan might drop in value during a broader stock market downturn. But longer term, I’m confident it will keep delivering returns that could fund a very comfortable retirement.
