Making a million from the stock market may not be an easy task. However, it can be made easier by investing through a Stocks and Shares ISA. It provides tax advantages, as well as a simple and cost-effective means of buying high-quality businesses.
Furthermore, the FTSE 100 appears to offer a favourable risk-reward opportunity. Its recent performance has been disappointing, but its track record suggests that it may deliver improving returns in the coming years.
While the FTSE 100 may not have recorded strong growth in recent years, the long-term track record of the index suggests that it has investment appeal. In fact, it has risen from 1,000 points almost 36 years ago to trade at a record high of above 7,000. This shows that it has the potential to deliver a high-single digit annual return when dividends are included.
A similar rate of growth over the coming years could be very achievable. The valuations of numerous large-cap stocks are below their long-term averages at present. There may be risks facing the world economy, but they appear to have been factored in by investors. The result could be an improving performance from the FTSE 100.
It may be possible to obtain higher returns from smaller companies than from FTSE 100 stocks. After all, smaller businesses often have greater room to grow than their larger counterparts.
However, the FTSE 100 may offer less risk than the FTSE 250 and smaller stocks. Not only does it offer greater diversity, the FTSE 100 also contains businesses that may provide greater size and scale. This may mean that they have stronger balance sheets, more diverse operations, and could overcome potential threats to the world economy better than their smaller peers in the short run.
Therefore, from a risk-reward perspective, the FTSE 100 may have relative appeal at a time when the outlook for the world economy is uncertain over a short-term period.
Stocks and Shares ISA
Investing in the FTSE 100 through a Stocks and Shares ISA may be the best means of accessing its growth potential. This account offers greater tax efficiency than a bog-standard share dealing account, while also having significantly more flexibility than a SIPP. Alongside relatively low costs and a simple process of administering it, this may mean that a Stocks and Shares ISA offers the most appealing means of capitalising on the FTSE 100’s future growth prospects.
Certainly, there may be volatility ahead for the index. However, with it having a solid track record of growth and the valuations of its members appearing to be favourable, now could be the right time to invest in a variety of large-cap shares for the long run. It could improve your portfolio returns and help you to make a million over the coming years.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.