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£1k to invest? I’d go for a Stocks and Shares ISA in 2020

Whenever you have a bit of money to spare, I recommend putting it to work in a Stocks and Shares ISA. While a lump sum like £1k will not make you rich on its own, it marks another positive step on the long journey to building a decent retirement portfolio.

The more money you can invest in the stock market, the better your chances of retiring in comfort. I reckon there are plenty of buying opportunities at the moment, after a volatile start to the year, with investors worrying about everything from the US-Iran stand-off to the coronavirus, sending share prices lower.

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Issues like these are a worry, and should not be taken lightly. However, in the longer run, stock markets have shrugged off all manner of problems, to outpace almost every other rival investment. I expect that to continue once current worries ease.

Good time to invest

Last year was a good one for stock markets. Globally, share prices rose about 25% in 2019, while the FTSE 100 grew almost 12%. The UK index of top stocks also yielded around 4.5% on average, lifting total returns to around 16%, compared to the miserly 1% or so you will get on cash deposits. Despite this, it still contains plenty of bargain stocks today.

You could keep things simple by investing in a low-cost exchange-traded fund (ETF) that tracks the FTSE 100, such as the ones sold by iShares, Vanguard, and others. This will expose your £1,000 to the 100 largest companies in the UK by market capitalisation, and allows you to benefit from all future dividends and growth.

If investing for retirement, you should be putting money away for periods of 30 to 40 years. History suggests the FTSE 100 grows at an average 7% a year, and that would turn your £1,000 into £14,974 after 40 years, provided you reinvest all dividends back into your portfolio.

You could look beyond the FTSE 100, and invest in medium-sized sized companies through the FTSE 250, which has grown at a faster pace lately. Again, iShares and Vanguard offer low-cost ETFs tracking this index.

Or you could venture further afield, by putting your £1k lump sum in an ETF tracking the US S&P 500, or even emerging markets.

Buy individual stocks

If you are happy to take on a bit more risk, you could start investing in individual stocks instead. These are more volatile than buying an entire index, but if you assemble a portfolio of different companies, you can balance out the risks over time.

I would suggest starting with a solid blue chip. Pharmaceutical giant GlaxoSmithKline, global bank HSBC Holdings, and housebuilder Taylor Wimpey spring to mind.

Over time, your portfolio of shares could help you build a nice shiny nest egg when you retire.

Take your profits tax free

Don’t stop at £1,000 – you can invest up to £20,000 in a Stocks and Shares ISA this financial year, and take all of your returns free of tax for life.

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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.