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A Stocks and Shares ISA can be a great resource for UK investors. But with inflation high and interest rates rising, when should we look to start one?
In my view, the best time to start is… yesterday. Since that’s not an option, right now is the next best opportunity.
Investing in stocks
If I were looking to get started with a Stocks and Shares ISA, I’d do so as soon as possible. The reason is straightforward and it comes down to the core of what investing in stocks is about.
When I buy shares as an investor, I come to own part of a company. And there are two main strategies for earning a return when it comes to investing.
The first involves finding stocks that are going to be worth more because the business is going to make more money. This is growth investing.
Another is by receiving payments from the company distributing its earnings as dividends. This is income investing.
Growth investing and income investing are two very different approaches and different stocks suit different styles. But there’s one important feature that’s shared by both strategies.
The common theme with investing is that it involves trying to make money from the underlying business. And this is why I think the best time for investors to get started is now.
Compound interest
The way to build wealth in the stock market is by reinvesting returns. This happens in different ways for growth and income investors, but it’s crucial to both.
With growth stocks, the businesses aim to generate more cash in the future. They do this by reinvesting their earnings in a variety of ways.
With income stocks, earnings are paid out as dividends. Investors then build wealth by buying more shares with the dividends their investments pay them.
In both cases, though, what matters is the ability to compound earnings growth at a good rate. And one of the most important things when it comes to compound interest is time.
Suppose I manage to compound £1,000 at 7% per year (roughly the FTSE 100 average). After 10 years, I’ll be earning a £129 annual return, but after 25 years, I’ll be earning £355 per year.
The point is clear – a good investment does better the longer it has to increase. Whether it’s a growth stock or an income stock, the compound interest equation works the same way.
Getting started
That’s why I’d get started straight away. A gloomy macroeconomic outlook might make it tempting to try and wait for a better time to get started, but I think this is a bad idea.
If I put off opening a Stocks and Shares ISA, I might find things take a while to settle down. The prospect of lower share prices might stay in the distance for a number of years.
During that time, I’d have been losing time to compound my investments. And I think the cost of that would likely be worse than buying shares during a difficult macroeconomic environment.
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