A lump sum of £40k is well worth investing in a Stocks and Shares ISA. Currently, the annual allowance is £20,000. So it’s possible to spread the investment over two periods.
And the money could be deployed quickly if choosing to invest just before and just after the ISA allowance renewal date of 6 April.
But I wouldn’t hang around. With a lump sum of £40k I’d want to put the money to work immediately. And that’s because there’s a big opportunity in the stock market right now. So I’d invest half the money straight away.
An opportunity for investors
We’ve just endured a bear market for many shares. And my reading of the situation is that we look closer to the end of it than to the beginning. It’s possible for stocks to lurch down further from where they are now. But many companies have been reporting robust trading and upbeat outlook statements.
On top of that, the negative geo-political and general economic pressures appear to be easing. It’s early days, but there are positive signs around if we care to notice them.
Meanwhile, in many cases, valuations and share prices have been depressed by the onslaught of negative news we’ve had over the past three years or so. But that situation may add up to being an opportunity for the investor with a long-term focus.
Bear markets are where the roots grow for the next bull market. And when shares prices and valuations are lower they often form a solid platform to build upon. Indeed, one well known piece of advice is to buy low and sell higher. And I’d argue that the current conditions in the market are what ‘low’ looks like.
However, buying carefully chosen stocks now is no guarantee that they’ll shoot straight up. There’ll almost certainly be more volatility ahead. And underlying businesses could falter again before getting into an enduring growth groove.
The time is now
But buying stocks and shares now strikes me as a better option than waiting until a raging bull market is in full swing. Investors are more likely to achieve decent long-term and compoundable returns when starting from a low base.
The alternative is to buy when stocks have risen and when valuations are higher. The general economic environment may seem more comfortable when such conditions arrive. But the chances of getting outstanding stock market returns will likely be lower from such an elevated position.
For me, the time is now. And with £40k to invest, I’d set my sights high and aim for a million over the long haul. And to do that, my focus would be on compounding gains year after year.
But how long would it take? Well, if I could match the long-term performance of America’s S&P 500 index it would take around 33 years to get to a million. With dividends included, the index has delivered a compounded annual gain of 10.5% since the mid-1960’s.
But I’d aim for higher annual returns by investing in the shares of individual companies. And that strategy may potentially shorten the time it takes to compound my way from £40k to a million with stocks and shares.
Nothing is certain. And I may even lose money with my investments. But that will not stop me from trying. And I’d start right now.
