When it comes to boosting your finances, investing through a Stocks and Shares ISA could help your money grow in a tax-efficient way. This is because you can pay in up to £20,000 during the 2023/24 tax year, and you won't have to pay tax on any gains your money makes.
And whilst for the most part, your money isn’t locked away (with Wealthify's Stocks and Shares ISA, you can withdraw your investment at any time without penalty), investing isn’t something you want to just do on a whim.
Investing is considered to be something you commit to long-term. So, before you start, ask yourself if you're prepared to stick with it for a number of years. Here's why.
A long-term view could help you ride out market bumps
There’s no denying it – watching the value of your investments drop is stressful, and the fear of losses is one of the main things that put people off investing.
However, committing long-term could be your secret weapon as an investor. Because no matter how cautious you are in the types of assets you invest in, dips in the value of your investments is normal to experience, and doing this could help you to smooth out market bumps.
But what do we mean by that exactly?
Well, financial markets can be unpredictable (both over the short and long-term), causing the value of investments to go up and down over time. This is because they're impacted by various factors, such as economic trends and global events.
But instead of panic selling if you their value drop, holding onto your investments could give them a chance to go back up in the future. If you sell when they're down, you'll cement your losses and make them a reality without giving them an opportunity to potentially recover.
And if you’re still not convinced, there’s plenty of evidence to back up the benefits that having a long-term vision might have. For instance, Bloomberg data shows that if you'd invested in the FTSE 100 for any 10-year period between 1984 and 2021, you would have had an 89% chance of making a positive return. Not bad, right?
Your money could have more time to potentially grow
Sticking with your Stocks and Shares ISA over the long-term won't just help you ride out market dips. It may also give your money more time to benefit from the power of something called 'compounding'.
Put simply, this is when your returns generate further returns. We'll explain how this works below.
This is just an example, but let’s say you invest £1,000 in a hypothetical investment account and get a 5% dividend each year, which is reinvested back into your Investment Plan. In the first year, your profit would be £50. If you do not withdraw any money, then £50 will just be added to your existing capital, making your invested capital worth £1,050.
In year two, your 5% profit is £52.50 – and so compounding continues through the years, which might help your money to grow even further.
A good way to take advantage of compounding could to invest small sums regularly over many years. Not only could it help to accelerate the effects of compounding on your money, but it will help you to build your investment up gradually – especially if you set up a regular Direct Debit. This is something you can do when you invest with Wealthify, and means you don't even have to think about it.
Plus, when markets are not performing so well, this could enable you to purchase lower priced shares and stocks which could eventually prove to be a good buy if they go up in value later.
Thinking long-term lessens the temptation to withdraw
If you choose to withdraw money from your Stocks and Shares ISA, it could take some time before you get your funds. This is because your investments would need to be sold first.
As a result, you might want to act as though your money is locked away for the long-term, and not put in any that you're likely to need in the near future (such as your emergency savings!).
And remember, taking the money out of your Investment ISA will inevitably slow any potential growth within that account. So if you’re not ready to stay invested for a long period of time (at least 5 years), or you think you might need the money you planned to invest in the short-term, then you may want to consider alternative routes to help your finances flourish.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Seek financial advice if you're unsure about investing.