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One major advantage UK investors have is the Stocks and Shares ISA. With most people focused on finding the lowest trading commission fees, it’s easy to forget that taxes are a real expense to consider. And apart from having to pay HMRC on any profits made, the process of share matching for calculating capital gains tax is a headache in itself.
Fortunately, all of it can be legally bypassed with this nifty tax efficient account. All capital gains and dividends earned inside my ISA are protected from the taxman. And over the long term, the elimination of tax expenses has an enormous positive impact on the wealth-building process.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
That makes it arguably one of the best vehicles to grow my nest egg. So if I’m looking to build my first £100k, how would I use my ISA to do this?
Using a Stocks and Shares ISA to passively build wealth
There are very few restrictions on what I can and cannot buy in my Stocks and Shares ISA. So if I want to invest in an exchange-traded fund (ETF) to match the underlying performance of an index, I can. The UK is home to several indices, with the FTSE 100 and FTSE 250 arguably the most popular.
The latter contains a broader range of smaller businesses, making it more volatile. In fact, over the first six months of 2022, the index fell by over 20% in the latest stock market correction. By comparison, the FTSE 100 was basically flat over the same period. But this increased risk comes with a higher reward.
On average, the FTSE 100 has delivered returns of around 8% per year, including dividends. The FTSE 250, on the other hand, is closer to 11%. And since I’m looking to maximise growth, I’m more interested in matching the higher performing index, even if there is a greater element of risk.
Assuming I can comfortably put aside £300 each month from my salary to invest in a FTSE 250 index tracker, hitting my £100k target would take 13 years.
Waiting for more than a decade is annoying. And I may even have to wait even longer if the stock market decides to have another downturn which, in my experience, that’s more likely than not.
Fortunately, there is an alternative investing strategy available that could accelerate the wealth-building process.
Reaching £100k faster
Investing through an ETF does have its advantages. Being able to put investments on autopilot without spending time researching stocks is delightful. And one way to accelerate the wealth-building process is to simply add more each month.
But it’s not always possible to find additional spare capital to put into my Stocks and Shares ISA. So, instead, I can seek to boost the average return through individual stock picking.
Stock picking requires a far more hands-on approach, analysing financial statements, business models, and industry trends, among countless other points of consideration. Needless to say, that’s a lot more work. And it doesn’t always pay off, since even the most promising stocks can turn out to be a loser.
But taking a stock-picking strategy is how investors like Warren Buffett made their fortune. And even if I only boost my returns to only 13%, that’s enough to wipe off more than a year from the waiting time.