When it comes to boosting your finances, paying into a Stocks and Shares ISA could help your money grow in a tax-efficient way. Whilst for the most part, your money isn’t locked away, investing in an ISA isn’t something you should just do on a whim. Some of the most successful investors are those that commit to it long-term. Be ready to stick with it for a number of years and ride out the ups and downs if you want to have a chance to enjoy any benefits of investing.
A long-term view can help you ride out market bumps
There’s no denying it, watching the value of your investments drop is stressful. Fear of loss is one of the main reasons that so few Brits have any investments. However, committing long term can be an investor’s secret weapon, no matter how cautious you are because it can help you smooth out market bumps. Financial markets can be unpredictable over the short-time and go up and down when you least expect it. When markets drop, it’s important to ignore the craze, resist the urge to sell, and think long-term. If you’re still not convinced, there’s plenty of evidence showing the benefits of approaching investing with a long-term vision. For instance, people who invested for any 10-year period since 1986 until February 2019 in the FTSE 100 index have an 87%1 chance of making a gain.
1: Based on calculation undertaken by our internal team based on Bloomberg data as at 20/02/2019
Your money has more time to potentially grow
Sticking with your Stocks and Shares ISA over the long-term doesn’t just help you ride out market bumps, it can also give your money more time to benefit from the power of compounding. Put simply, compounding is when your returns generate further returns. Let’s say you invest £1,000 in a hypothetical investment account and get a 5% dividend each year which is reinvested into the fund. In year one your profit is £50. If you do not withdraw any money from this account, this £50 will add 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 helping your money grow.
A good way to take advantage of compounding is to invest small sums regularly over many years. Not only does it help accelerate the effects of compounding on your money, it also helps your pot grow gradually and effortlessly, especially if you pre-set a monthly Direct Debit for a long period of time. And when markets are not performing so well, this can help you access lower priced shares and stocks which could eventually prove to be a good buy if they later gain in value.
Thinking long-term lessens the temptation to withdraw
Withdrawing money from your Stocks and Shares ISA isn’t a straightforward process and it would typically take some time before you get your funds. As a result, it might be better to assume that your money is locked away for the long-term. Remember that taking money out of your investment ISA account will inevitably slow any potential growth within that account, so if you’re not ready to remain invested for a long period of time, or you think you might need the money in the short-term, 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.