Deciding where to invest for retirement can be a challenging process. Assets such as cash and bonds may offer a relatively low risk of loss, but their returns may not improve your prospects of retiring early.
As such, for investors who have a long time horizon, the stock market may be appealing. It has a track record of outperforming other mainstream assets, and is highly accessible in terms of costs and simplicity.
With the FTSE 100 and FTSE 250 appearing to offer good value for money, now could be the right time to buy a range of shares in a Stocks and Shares ISA to improve your prospects of retiring early.
The main appeal of a Stocks and Shares ISA is its tax efficiency. No capital gains, income or dividend tax is payable on any amounts invested through the product. This could lead to considerable savings for an investor over the long run – especially with the annual dividend allowance currently being just £2k per annum. As such, while tax savings may not be obvious in the short run, in the long run they could be highly appealing.
In addition, a Stocks and Shares ISA is a low-cost and simple means of accessing the stock market. Many sharedealing providers charge the equivalent of a cost of a single trade in annual ISA fees, while the operation of the product is similar to a bog-standard sharedealing account in terms of the range of investments available and its accessibility.
In terms of where to invest £1k in a Stocks and Shares ISA, the FTSE 350 appears to offer significant long-term growth opportunities. The FTSE 100 has a dividend yield of 4.4%, while the FTSE 250 has a yield of 3%. Both figures are above their long-term averages, and suggest they could be undervalued.
With the world economy facing an uncertain future, their lower valuations may be merited. Investors may wish to focus their capital on businesses that have track records of solid and dependable growth in a variety of economic conditions. This may mean they purchase defensive shares which are less likely to be negatively impacted by a slowdown in the world economy’s growth rate at a time when risks, such as a global trade war, are relatively high.
Furthermore, with the reinvestment of dividends having historically contributed a large proportion of the stock market’s total returns, focusing your capital on higher-yielding stocks could be a shrewd move. They may provide above-average returns should the stock market experience a period of slower growth due to ongoing global economic risks.
With the FTSE 100 having returned 9% per annum over its 36-year history, investing £1k in the index today could lead to an improvement in your retirement prospects. Although there may be periods of decline between now and then, the return potential of the stock market, relative to other major asset classes, could make it a worthwhile place to invest through a Stocks and Shares ISA.
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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.