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Here’s how I’d invest £20k to build a million pound Stocks and Shares ISA

What does the stock market do best? Turn relatively small amounts of money into much bigger amounts over time.

We are now entering the ISA season, when people look to use their annual tax-free allowance before it expires at midnight on 5 April. This year, you can invest up to £20k in a Stocks and Shares ISA, to help build your wealth. If you leave that in the market for the long term, and top it up whenever you have money to spare, you could ultimately build a £1m investment portfolio, and transform your retirement prospects.

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I know investors are worried about the coronavirus, with the FTSE 100 falling sharply this morning. Nobody knows what impact it is going to have, creating uncertainty.

The problem is, if you wait until the outlook is sunny and bright, you will never invest money in the market, because there are always clouds on the horizon. Some people have spent the last decade shying away, and if they left their money in cash, they will have paid a heavy price in lost share price growth and dividend income.

Put your money to work today

The FTSE 100 and FTSE 250 both look promising right now, as the UK nears a Brexit resolution, and overseas investors take notice.

I’m particularly keen on the FTSE 250 right now. This is packed with medium-sized British companies that have greater exposure to the domestic economy, whereas FTSE 100 blue-chips generate three-quarters of their earnings overseas. These have been knocked by the strengthening pound, as this reduces the value of their dollars, euros and rupees when converted back into sterling.

The FTSE 250 has delivered a total return of 48.9% over the last five years, against 32.3% for the FTSE 100. 

Thrash the returns on cash

One reason shares are so rewarding is that they pay dividend income as well as generating capital growth, which wise investors pay straight back into their portfolios to buy further stocks or fund units. Currently, the FTSE 350 yields 4.24%, three times the amount you will get on the best Cash ISA.

This winning combination of share price growth and dividend income, is what will turn your £20k into a far mightier amount. If the FTSE 250 maintains its long-term average return of 9% a year, your money would grow to around £113,000 in 20 years’ time, and an astonishing £628,188 over 40 years, the average length of time over which people invest for their retirement.

To hit the million mark, you should aim to use next year’s ISA allowance, and the next year’s too, whenever you have money to share.

There are many undervalued shares on the market right now, and a quick search on the Fool website will throw up plenty of opportunities.

Look for companies with strong balance sheets, loyal customers, steady cash flows, and a track record of increasing dividends. These are the type of stocks that can help you build a £1m portfolio. Your £20k is the start of something much bigger.

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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.