If you have £200 a month to invest in 2020, opening a Stocks and Shares ISA could be a great way to start your savings journey. Opening one allows you to capitalise on the opportunities presented in the stock market.
Investing in the stock market might seem like a risky prospect at first. But, over the long term, multiple studies have shown this is the best way to grow your wealth.
Indeed, one study found UK stocks returned 5.5% per annum on average after inflation for the past 110 years. That’s more than double the annual return cash investors earned.
The best way to replicate these returns is to invest in a low-cost FTSE 100, FTSE 250, or FTSE All-Share tracker fund. Most online stock brokers will let you do this from as little as £50 a month. Most online brokers also allow you to open a Stocks and Shares ISA.
The great thing about these investment wrappers is their tax benefits. Every saver is allowed to contribute up to £20,000 a year into an ISA. Any capital gains or income earned on this savings nest eggs is tax-free. In fact, you don’t even need to declare ISA income on your tax return.
This is ISAs are without a doubt one of the best products for savers. Especially higher and additional rate taxpayers. By making the most of the tax-efficient Stocks and Shares ISA wrapper, and keeping investment costs low, you can dramatically increase the performance of your investment returns over the long term.
Contributions add up
A monthly deposit of £200 might not seem like a huge amount of money at first. But, over the long term, these small contributions really add up.
For example, an investment of £200 a month in an FTSE All-Share tracker fund for 20 years would be enough to build a nest egg worth £88,000. That’s assuming an average annual return of 5.5%.
In reality, the FTSE 100 and FTSE 250 have produced much better returns. Since inception three decades ago, the FTSE 100 has returned around 9% per annum. Meanwhile, the FTSE 250 is returned around 12%.
It looks as if these higher rates of return are sustainable. The global economy is now more integrated than ever before and in the last 100 years, global conflicts held back equity returns.
An annual rate of 12% would be enough to turn a monthly deposit of £200 into £200,000 after two decades of saving. After four decades, the pot could be worth as much as £2.4m.
Therefore, if you’re looking to invest £200 a month in a Stocks and Shares ISA in 2020, the best place to invest your money could be a low-cost index fund. The FTSE 100 and FTSE 250 are both great indexes to track. Further, because they’re the largest indexes in the UK, most providers offer tracker funds with low costs and charges.
Rupert Hargreaves owns no share 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.