UK Markets close in 4 hrs 1 min

How I’d invest £20k in a Stocks and Shares ISA to get rich and retire early

Peter Stephens
A stock price graph showing growth over time

Investing through a Stocks and Shares ISA could be a sound means to improve your chances of retiring early. It’s a simple product to understand, with withdrawals being tax-free and flexible. It’s also cheap to open and administer, while the lack of tax charged on any profits or dividends generated from investments in an ISA could make it highly appealing to a wide range of people.

Of course, deciding where to invest can be challenging – especially when there are numerous options available. However, with the stock market offering low valuations, international growth potential and income opportunities, it may be the best means of improving your retirement prospects.

Low valuations

The FTSE 100 and FTSE 250 indexes currently trade on highly appealing valuations. Evidence of this can be seen through their dividend yields, having income returns of 4.3% and 3% respectively. Both of these figures are higher than their historic averages, which indicates that even after a decade-long bull market, there are still buying opportunities available.

Within each index, however, are a number of stocks that offer wider margins of safety than their index peers. Sectors such as banking, retail, energy and industrials have been relatively unpopular among investors in recent years. Risks such as Brexit, the global trade war and geopolitical uncertainties have been contributing factors and could mean that there are numerous buying opportunities for investors.

Low valuations mean that there are income opportunities on offer in both indexes. While both of these  may have relatively high yields at the present time, around 25% of their respective members currently offer income returns that are in excess of 5%. This could mean that investors have the opportunity to generate high-dingle digit annualised returns over the long run without requiring significant amounts of capital growth.

Growth potential

When it comes to growth potential, both indexes also offer international exposure that could catalyse their performances over the coming years. While the FTSE 100 is often viewed as an international index due to it generating around two-thirds of its revenue from outside of the UK, the FTSE 250 also offers international exposure. Around 50% of the income generated by its members is derived from non-UK markets, which means there are ample opportunities for investors to gain access to the fast pace of growth offered across the emerging world.

While the UK economy could produce an improving rate of growth as Brexit risks potentially dissipate, emerging economies such as India and China appear to offer significantly higher rates of growth. As such, focusing your capital on undervalued companies with exposure to such economies could prove to be a smart move. Those companies may catalyse your portfolio’s performance and improve your prospects of generating a large nest egg that enables you to retire early.

The post How I’d invest £20k in a Stocks and Shares ISA to get rich and retire early appeared first on The Motley Fool UK.

More reading

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