Image source: Getty Images
I hesitate to say that anything is a “no-brainer” move when it comes to investing. However, I believe this is absolutely the case when it comes to opening a stocks and Shares ISA. Doing so means that an investor would not have to pay taxes on any profits they make or dividends they receive.
So exactly how much cash would someone need to accumulate in this account to then generate £800 of monthly passive income? Well, that partly depends on how much they have to invest and how long they plan to stay invested.
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.
Average performance, excellent results.
Let's assume that an investor is able to save the maximum ISA allocation of £20,000 in year 1. Let's also assume that they were able to generate a 7.5% return on their portfolio each year. As it happens, that's roughly the long-term average performance of the FTSE 100 (including dividends). Of course, the past is no guide to future returns. But it's probably the best indicator we have.
Putting all that into my trusty calculator gives me a total pot of almost £130,000 after 25 years. Switching to high dividend stocks and achieving a 7.5% yield would yield £9,724. Spread over 12 months, this becomes just over £800 a month to supplement any other income (possibly a pension).
Ahead of the pack
Naturally, there are a lot of assumptions made here. That monthly income won't seem so great in a quarter of a century, either. We can thank the eroding power of inflation for this.
On a more positive note, the example assumes £20,000 is invested once and nothing more. If an investor wanted to speed things up, they might consider putting extra money to work in the coming years. They can also try to beat the market by looking for only the best growth stocks money can buy. This could increase wealth at a faster rate.
As it happens, this is exactly the strategy of companies listed on the FTSE 100. Scottish Mortgage Investment Trust (LSE: SMT). While the last three years have been difficult, its share price has greatly outperformed the index over the long term.
Much of this can be attributed to buying some of the world's biggest tech stocks before every investor and their dog decided to do the same. Think tesla in 2013, when they were trading at around $6 each. When US markets closed last night (January 6), that same stock was changing hands for $411. And it really only takes investing in a few incredible winners like this to make a difference.
Opportunities galore!
Of course, a person trusting all their hard-earned money to a single manager could be a recipe for disaster if the latter's picks don't work out. And the market is concerned that Scottish Mortgage's penchant for holding stakes in private companies that are difficult to value could come back to bite it (and its holders) if the economic outlook worsens.
For this reason, I think it's worth considering stocks that might be flying under the investment trust's radar or are too small to consider buying a stake in. And I think there are quite a few brilliant opportunities on our UK stock market right now, which is very reasonably priced!
