I reckon a Stocks and Shares ISA is a great place to put £500 a month right now. You’ve probably heard all the arguments against putting money in a Cash ISA already. Indeed, the interest rates are pitifully low. And your money could gradually lose its value as it falls behind the rate of inflation.
Compounding your returns from shares
No doubt you also know about the big dividend yields that have been paid by many companies on the stock market up until the recent stock market crash. Not all companies have stopped their dividends, and many will likely restart shareholder payments in time. And if you reinvest that dividend income, you could be on your way to compounding your returns. And probably at a faster rate than any cash savings account can grow your money.
Of course, the unknown factor with shares and share-based investments, such as managed funds and trackers, is that share prices can fluctuate. Indeed, unlike a cash account, the money you invest can go up and down. And you can’t have missed the recent coronavirus-induced stock market crash, which toppled many shares.
But the fluid nature of share prices brings opportunity as well as threat. And if you choose your investments carefully, capital appreciation from rising share prices can turbo-charge your investment returns. And that’s on top of dividend income.
If you’re new to the world of investing in the stock market, I’d recommend you start with a collective investment before trying to pick the shares of individual companies. That’s what I did when I started. My first investment was in a FTSE 100 tracker fund.
And I reckon the FTSE 100 is a good place to begin today. The index follows the fortunes of the UK’s largest public limited companies. I see a FTSE 100 tracker fund as a good vehicle for harvesting a decent-sized dividend yield too.
If you select the Accumulation version of the tracker fund, the dividends will be rolled back into the fund automatically for you. And that will put you on the path to compounding your money. The alternative is the Income version, which will pay the money to your bank account.
One of the behaviours I like about the FTSE 100 is that it always seems to bounce back from its lows. And we’ve had a great demonstration of that feature over recent weeks. The reason for that is many of the underlying businesses behind the shares tracked are cyclical in nature.
So a regular monthly investment of £500 in a Stocks and Shares ISA could work well with an FTSE 100 tracker. When the index dips, you’ll get more units for your money. And when it peaks, you won’t be investing all your annual ISA allowance at the highs.
And if you look at the long-term chart for the FTSE 100 index, you’ll see it tends to rise over time. I think that trend looks set to continue and will probably help to keep your investment forging ahead of inflation and delivering decent returns over time.
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Kevin Godbold has no position in any 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.