Putting some money away regularly in a Stocks and Shares ISA could help me improve my financial situation over the long term.
By investing a few hundred pounds a month and adopting an investing mindset of years not months, I think such an approach could help me grow my wealth. Here is how I would go about it.
Regular saving in a Stocks and Shares ISA
My first move would be to set up a Stocks and Shares ISA. I would then get into the habit of putting £230 a month into it, for example, through a standing order. Doing that regularly would hopefully make me miss it less when it left my bank account each month!
Investing, not trading
My approach would be based on investing, not trading or speculating.
What is the difference? One way to make this clearer is to consider what I would not be doing. I would not be buying shares in companies I did not understand. I would not buy shares based on their price alone. I would not be investing in a company today simply hoping to unload my shares in a matter of weeks after a jump in price.
Instead, I would invest for the long term. That means I would research companies and only buy shares in those I understood. I would look for businesses I thought could generate substantial profits in the long term. If they were trading at an attractive valuation, I would consider buying them for my Stocks and Shares ISA. To reduce my risk, I would always keep my portfolio diversified across a number of companies.
What if I could not find any shares in good companies trading an attractive valuation? Then I would wait until I could – even if that took years. Just because I put £230 a month into my ISA does not mean I need to invest it immediately.
Building wealth over the years
Putting money in an ISA and buying shares does not mean I will succeed in building my wealth though. I need to buy the right shares!
One approach would be to focus on income. For example, I hold Direct Line in my Stocks and Shares ISA. It has a dividend yield of 11.5%. That means if I invest £100 today, I ought to earn £11.50 a year in dividends. Those are never guaranteed though, which is one reason I diversify.
That £230 a month adds up to £2,760 each year. Investing this at an average yield the same as Direct Line’s could earn me almost £320 in dividends annually. If I compounded those dividends (meaning reinvesting them in more shares) I could build my wealth faster while still only investing £230 each month.
Alternatively, I could invest in companies I hope will grow fast. That could send their share prices up, increasing the value of my investments.
One such choice from my Stocks and Shares ISA is digital ad agency group S4 Capital. But its shares have almost halved in the past year despite strong revenue growth. That is a reminder that as well as considering a business’s growth prospects as an investor I also always need to consider its valuation. Overpaying even for a fast-growing business might not help me build wealth!
The post I’d build wealth by investing £230 a month in a Stocks and Shares ISA appeared first on The Motley Fool UK.
C Ruane has positions in Direct Line Insurance and S4 Capital plc. 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.
Motley Fool UK 2022