My Stocks and Shares ISA is a great tool for my investment goals. It allows me to buy up to £20,000 worth of stocks within a single tax year, which runs from April to April. ISA investing allows me to avoid incurring capital gains tax on any profits I make when I sell my investments. I’m looking to invest £1,000 a month for the foreseeable future and this benefit could save me thousands in tax over the years.
Tweaking my ISA investing parameters
There are several different parameters that will influence how much my £1,000 can grow via ISA investing. The easy one to start with it the amount I’m going to invest. I’ve put it at £12,000 a year. Given the ISA limit is currently £20,000, I could in theory invest more.
However, I’d rather invest what I can afford each month instead of stretching myself. I’d need to almost double my monthly investments to max out my allocation. In an ideal world I would, but I want to avoid having to move money back out of my ISA during that year and potentially lose that amount off my allowance.
An important element to consider with ISA investing is my time horizon. The longer I’m happy to let my ISA pot build up, the better the end result. The main reason for this is the compounding impact.
Let’s say my stocks generate an average return of 5% a year. £12,000 would be worth £12,600 after a year fully invested. If I ignore the new inflows of £1,000 a month for a moment, the £12,600 from year one would be worth £13,230 in year two. So in year one the funds generate £600 profit, but in year two that increases to £630. The increase is due to the compounded impact of the profits.
The point here is that in general, the longer I leave my ISA investments to grow, the larger the final pot should be.
Making £1,000 work harder each month
Another thing I need to think about with my £1,000 a month is what type of stocks I want. ISA investing gives me a wide remit of companies I can hold. I’m not confined to holding only FTSE 100 stocks.
Given the breadth of companies to choose from, I can be selective in the type I invest in. For example, I could target growth stocks in fast-paced industries such as technology and healthcare. These areas could offer me a higher average return than the 5% mentioned earlier. If I was able to increase my return to 8% a year, then after 10 years I would have an ISA pot worth over £185,000.
The risk of taking on this higher return is the potential that the stock flops, or the positive outlook was overhyped. So I do need to be careful in this regard.
Overall, it’s clear that with the right time horizon and stocks I buy, £1,000 a month could go a long way!
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Jonathansmith1 does not hold shares in any company mentioned. The Motley Fool UK has no position in any company 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.