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My stocks and Shares ISA is one of the provisions that allows me to protect my stock market gains from tax. It allows me to invest £20k each year in the market and accumulate profits or dividends without owing anything to HMRC. If you were starting from scratch with a £20k allowance this year, here's how you'd try to increase it to seven figures.
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 type of tax advice. Readers are responsible for conducting their own due diligence and obtaining professional advice before making any investment decisions.
Diversify for the long term
Since I'm several decades away from retirement, my focus is investing primarily in growth stocks. This is because, over the long term, the returns should be higher than buying value stocks or more mature companies. If we look at where the big US tech stocks were trading a decade ago, their share price growth is exceptional.
The risk is that it will be difficult to pick winners. It's easy to sit back and say I would have bought NVIDIA shares a decade ago, but the fact is, I didn't. Furthermore, for every stock that prospers, there is another that goes bankrupt. Therefore, the return may be high, but the risk is also high.
To try to get my ISA to £1 million, there are a couple of things I can do. One is that I can diversify my risk by investing in a lot of different stocks. Even if some don't perform as well but one takes off, the gains will more than make up for the others.
The other point of my strategy is to focus on the sectors of the future. Renewable energy, artificial intelligence (ai), and electric vehicles (EV) are just a few examples of where I think demand should increase in the future. Selecting ideas from these areas should give me a better chance of making a profit.
An action for now (and for the future)
As an example of an action I would like to include, tesla (NASDAQ:TSLA) comes to mind. The share price is down 31% over the past year. I don't see it as bad, since it seemed quite overrated to me.
I think the electric vehicle giant is a perfect example of the type of stock for my long-term ISA strategy. It has a dominant position in the sector. There is great potential for growth in the coming years. About 18% of total cars sold last year were electric vehicles, up from 14% in 2022. It is increasing, but there is still a long way to go.
Therefore, I expect the share price to rise in the coming years as revenue and profits continue to rise.
Some will point to the recent stock decline and say competitors are eating into market share. This is a risk, but again, let's look at the big picture. I don't intend to buy and sell stocks for a year. I want to keep it for a decade. Over the past five years, the stock is up 1,137%. Last year's drop is a drop in the ocean.
You would expect to be able to achieve an average annual growth rate of 9%, although this is not guaranteed and you may not achieve it. But if I started investing now from scratch and used my £20,000 limit each year, my pot could grow to over £1m by year 19.
