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Investing with a Stocks and Shares ISA in 2023 may seem like a risky move. After all, there is still a lot of uncertainty in the economy. And with the rising cost of capital, it is becoming significantly more expensive for companies to raise external funds.
Yet many blue-chip companies continue to generate excess cash flow, despite a crackdown on consumer spending. And while the UK’s flagship index, the FTSE 100has already recovered Since the stock market correction of 2022, many companies have not been so lucky.
In other words, there may still be some bargains out there. With that in mind, let’s explore why I think drip-feeding £500 every month in 2023 could be a lucrative move in the long run.
1. Bargain reviews
During periods of stock market volatility, investment decisions are rarely made based on rational thought. Research by behavioral finance institutes has long shown that the pain of loss is significantly more potent than the thrill of gain.
So it’s no surprise that when the market takes a turn for the worse, most investors make the mistake of panic selling anything with a pulse. And that includes high-quality companies that are largely unaffected by economic factors that dampen investor confidence.
Fortunately, this means that more thoughtful investors can now add some fantastic deals to their Stocks and Shares ISA at bargain prices.
Of course, buying during volatility can be risky. Discount stocks may become even cheaper if investor confidence continues to fall. That’s why drip-feeding £500 each month, rather than investing all at once, is probably the most sensible approach.
Suppose today I buy UK stocks that look cheap and continue to fall. In that case, I can now buy more at an even better price.
2. Higher dividend income
Another byproduct of low valuations is a higher dividend yield. Many FTSE 100 stocks now offer returns above the historical index average of 4%. And for patient investors, this can unlock an impressive stream of passive income in the long run.
It is important to remember that in some cases, high performance can be a trap. Don’t forget that dividends are optional payments for companies. And if there’s no cash flow to fund them, a high yield today could drop significantly in the future. Consequently, it is critical that investors thoroughly investigate a high payout before opening or strengthening a position in your ISA.
3. Tax benefits of ISA
Investing through a Stocks and Equities ISA can often be more expensive than commission-free trading platforms. They usually come with annual account fees and higher transaction costs.
But ISAs have a critical advantage that makes up for this. All capital gains and dividends received are tax free.
Depending on the tax bracket an investor is in, an individual can reduce their investment expenses by up to 20%. Beyond accelerating the compounding wealth effect, if a portfolio reaches six or even seven figure territory, this tax immunity can make a world of difference.
Please note that tax treatment depends on each client’s individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and obtaining professional advice before making any investment decisions.
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