Stocks and Shares ISAs are a low-cost means for almost anyone to invest tax-efficiently. As such, now could be a good time to open an ISA and start investing for the long term. It could help you to retire early and enjoy improved financial freedom in older age.
Of course, deciding where to invest can be challenging, due in part to the range of assets that can be purchased in an ISA. However, through regularly buying shares in the FTSE 100 and FTSE 250, you could generate high returns in the long run.
Stock market appeal
In the past, holding assets such as bonds and cash has been popular among a wide range of investors. They offer lower risks than shares, and have delivered inflation-beating returns over the long run.
However, holding bonds and cash at the present time may not be an efficient use of your capital. Due to low interest rates, which are expected to rise at a slow pace over the coming years, the returns available on cash and bonds are likely to be disappointing. They may even fail to beat inflation over the medium term.
As such, investing in shares could be a better idea. The FTSE 100, for example, offers a dividend yield of 4.3% at the present time. This suggests that it could be undervalued, while its exposure to some of the world’s fastest-growing economies such as India and China may produce capital growth over the long term.
Regularly investing in shares is an excellent way to capitalise on the cyclicality of the stock market. It forces an investor to buy during periods of difficulty when share prices may be at a relatively low level.
During such times, an investor may naturally be inclined to avoid purchasing shares due to the potential for short-term losses. However, the track records of the FTSE 100 and FTSE 250 show that they have always recovered from their challenging periods to post higher highs.
As mentioned, a number of FTSE 100 and FTSE 250 shares may offer good value for money at the present time. Sectors such as healthcare and consumer goods could deliver high levels of growth in the long run as factors such as an ageing global population and rising consumerism in emerging economies catalyse demand. Likewise, sectors such as retail and banking have proved to be unpopular among investors, and could generate high returns as a result.
For smaller investors, buying units in an index tracker fund could be a good idea. They provide diversity and exposure to a wide range of companies that have historically delivered high-single-digit annual returns. Starting with a tracker fund via a regular monthly investment of £250, and going on to buy individual shares in the long run, could be a sound idea that helps your ISA to grow at a fast pace to improve your financial prospects.
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Peter Stephens 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.
Motley Fool UK 2020