Everybody dreams of financial freedom, but how do you achieve it? My answer is to invest in a diversified spread of stocks and shares, tax-efficiently through a Stocks and Shares ISA.
I think this is a better way of building your long-term wealth than investing in other asset classes, such as Bitcoin, buy-to-let property or gold, all of which have done well at certain points, but may now be past their best.
There is no doubt about it, Bitcoin catches the eye. At the start of last year, it was trading at around $3,500. Lately, it has been bobbing around the $10,000 mark, which means if you bought 12 months ago, you would have tripled your money.
The big problem with Bitcoin is its massive volatility. Its price can rise or fall by hundreds or even thousands of dollars in a matter of days. That makes it too volatile to rely upon for what is arguably your most important financial task, building your long-term retirement wealth.
There is nothing wrong with having a bit of gold in your portfolio, to offset any losses if stock markets fall. The price is up around 33% over the last five years, so you could enjoy some capital growth, too.
I wouldn’t put too much into gold, though. The precious metal doesn’t pay any income, which makes you wholly dependent on price movements to make a profit. If coronavirus worries recede and confidence recovers, gold could fall back, and sharply.
I was a big fan of buy-to-let property until former Chancellor George Osborne unleashed his multi-pronged tax attack in 2015. The 3% stamp duty surcharge and phasing-out of mortgage interest tax relief will eat into your profits, while you still have all the work of buying and managing a property, and finding and replacing tenants.
This is where I’d invest
I keep the vast majority of my retirement pot in the stock market, because I believe this will generate the best returns over the longer run. History suggests equities can deliver an average annual return of around 7% a year, from share price growth and reinvested dividend income.
Now maybe a good opportunity to invest, as current uncertainties have knocked the FTSE 100, throwing up plenty of bargain stocks.
You could start by investing in a spread of UK blue chips, for example spirits giant Diageo, housebuilder Taylor Wimpey, or Lloyds Banking Group, which currently yields 6.2%.
You could supplement this with an exchange-trading fund (ETF) tracking the FTSE All-Share, sold by managers such as iShares and Vanguard. Always invest within your Stocks and Shares ISA allowance, which allows you to put away anything up to £20,000 this financial year and take all your returns free of tax, for life.
This combination of tax-free capital growth and passive income is a better way to achieve financial independence than Bitcoin, gold, and buy-to-let, in my view.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Lloyds Banking Group. 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.