2020 has been one of those rare years in which a Cash ISA would have almost certainly have beaten a Stocks and Shares ISA. That’s making a few assumptions, of course. That the stock market won’t make a sudden surge past last year’s close by the end of the year. And that we’d invested our Stocks and Shares cash across the market rather than being clever enough to pick the big winners.
But there are always exceptions. And, as a long-term investor, I’ll always expect a stock market crash from time to time. And I reckon a Cash ISA in 2020 would still be a lousy investment anyway. With interest rates so low, there’s so little gain to be had it really doesn’t seem worth trying to save a minuscule bit of tax. So, whatever cash I choose to keep for safety will just stay in a plain savings account.
Isn’t it a bit early to be thinking about next year’s Stocks and Shares ISA? Well, in such a tough year as 2020, it helps me a lot to think about how much regular investment in an ISA could earn in the years ahead. Especially when I work out how much I could accumulate from investing modest sums of money regularly.
Long-term stock market returns
Now, yes, we’re in a tough year for shares. But years which end with the stock market down are often followed by years with better-than-average gains. So, I reckon it’s an especially good year to get started. But I won’t make any assumptions of an out-of-the-ordinary 2021. No, I’ll just stick with long-term averages for my ISA projections.
According to a Barclays study, the UK stock market has been turning in a long-term average annual return of 4.9% above inflation. That’s counting dividends and share price gains. Inflation is way down this year as spending has been massively slashed. But I’ll assume a future long-term average of 1.8% per year. So that’s a stock market return of 6.7% per year.
So, what if I invest £100 per week in a Stocks and Shares ISA? Firstly, the practicalities. Most ISA providers allow us to drip-feed small sums into our accounts, often as little as £20 per week. So I’d set that up to invest my ton every week. Depending on trading costs, I’d buy a stock every time I’ve accumulated £500-£1,000. But how much might I hope to earn, and over how long a timescale?
Nowhere near the ISA limit
Over the next 10 years, I’d have invested a total of £52,000. But my total ISA value, assuming that 6.7% return per year, would come in at £73,400. But how much would it come to after 20 years? A bit more than twice that perhaps? How about £213,000? Yes, that’s how much a Stocks and Shares ISA could get me in 20 years.
And that’s nowhere near the annual ISA limit of £20,000. The more I can use of my limit every year, the fatter my pension pot should get. And it will all be tax-free.
The post Here’s how I’d invest £100 per week in an ISA in 2021 appeared first on The Motley Fool UK.
Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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 2020