Why do people invest? To build long-term wealth for the future, primarily for their retirement. Investing regular monthly sums in a Stocks and Shares ISA in 2020 could be the best way to improve your chances of retiring in comfort.
It looks like there are plenty of buying opportunities on the stock market at the moment, and using an ISA allows you to take advantage in a tax-efficient manner.
Many people are deterred from investing a lump sum by the worry that the stock market will fall sharply immediately afterwards, especially as there are many political and economic risks facing the world economy right now. So instead, now might be a good time to start investing a regular monthly sum, £100, or whatever you can afford, on a monthly basis.
Good time to invest
The FTSE 100 grew almost 12% in 2019. The index of blue-chip stocks also yielded around 4.5% on average, which is higher than usual, giving a generous total return of nearly 16%. If you left your money in cash, you’d have been lucky to get 1%. Yet equities still looks relatively cheap compared to global markets, giving you a cushion if markets do fall.
You can find plenty of bargain stocks on the index today, trading at historically cheap valuations, and that always tempts me. If you buy high-quality companies when their prices are low, then hold them for the long-term, you can generate outsize returns.
You can find stocks trading on favourable valuations both in the FTSE 100 and FTSE 250. By setting up a regular investment plan, and paying in as much as you can afford, you could steadily build a portfolio of shares to give you a bright and shiny nest egg when you retire.
Watch out for risk
Although now looks a good time to buy shares, you have to prepare yourself for short-term volatility. We have already seen tensions ratchet up in the Middle East, the US-China trade stand-off hasn’t been solved, and Brexit could bring uncertainty during 2020.
The beauty of investing every month is that if stock markets do fall at some point, you actually benefit. That’s because you will pick up more stock with your regular monthly contribution, and that will quickly be worth more when markets recover, as they always do.
History shows that even after a major correction, indices such as the FTSE 100 can claw back their losses within months. By investing monthly, you’re well-placed to benefit.
Use your tax benefits
You can invest up to £20,000 in a Stocks and Shares ISA this tax year, simply and easily. This means you’ll never have to pay tax on your capital gains and dividend income for life, allowing you to shelter your wealth from HM Revenue & Customs.
There’s a good choice of Stocks and Shares ISA platforms, and the start of the year looks like a good time to open one and begin investing.
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Harvey Jones 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.