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£5k to invest? I’d put it in a Stocks and Shares ISA today

If you’ve a bit of spare cash, whether £500 or £5,000, investing it in a Stocks and Shares ISA is the best way I know of making it grow into something more substantial. Stocks and shares won’t make you rich overnight, but if you keep tucking money in a tax-free ISA, they could help you build a decent pot of money for your retirement over time.

This is where money gets bigger

The more exposure you have to stock market growth and dividend income, the better your chances of building enough money to enjoy a comfortable retirement, and avoid relying too much on the State Pension.

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Stocks and shares can be volatile in the short run, and investors are nervous about the impact of the coronavirus. This is obviously a concern, and markets could fall further, but they should also snap back once investors feel the authorities have the virus under control.

Over the last five years, the FTSE 100 index of top blue-chip stocks has delivered an average annual total return of 5.8% a year, or 35.6% over five years. That’s highly attractive at a time when you struggle to get 1% a year on cash. The FTSE 250 index of medium-sized companies has done better, with average annual growth of 8.3% over five years, a total return of 48.9%.

Get your retirement on track

Some people think investing is too complicated for them. But you can keep things really simple by setting up an online trading platform, and using it to buy low-cost index tracking exchange traded funds (ETFs). You can start with a FTSE 100 or FTSE 250 tracker, sold by the likes of iShares and Vanguard, then sit back and wait for the capital growth and income to roll in.

There will be volatility along the way, your money may even fall in value from time to time. But if putting money away for retirement, you should be investing for 20, 30, or 40 years, which gives plenty of time for share prices to recover. Remember to reinvest all dividends back into your portfolio, as this will turbo-charge your growth.

Over time, you should diversify by putting some of your money into international stocks, again, using ETFs. Fund managers SPDR, iShares, and Vanguard all offer trackers following the US S&P 500, or if you want global exposure, most ETF managers offer trackers following the MSCI World index.

Buyng direct equities

Those willing to take on a bit more risk could invest in individual stocks instead. You could reduce the dangers by building a portfolio of FTSE 100 companies, so if one or two slip, others could compensate by rising strongly.

There are plenty of fast-growing FTSE 100 stocks at the moment, Informa and Melrose Industries both rose around 50% last year, with utility company Severn Trent close behind, growing 43% (these are no guarantee of future returns though).

Whether you invest in trackers and stocks, leave your money in the market for the long run, and start looking forward to retirement instead of worrying about it.

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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.