Martin Lewis, the renowned money-saving expert, has declared that "far more people" should consider investing in stocks and shares ISAs. On his latest ITV show, he urged viewers to move beyond traditional savings accounts and explore the potential of tax-free investments.
What is a Stocks and Shares ISA?
A stocks and shares ISA is a tax-efficient account that allows you to invest up to £20,000 per tax year without paying UK income tax or capital gains tax on any returns. You can hold a variety of investments, including unit trusts, investment trusts, and individual shares.
Lewis explained: "A shares ISA is a tax-free way to invest and far more people should have one than do, even on volatile days like this. For many, investing feels risky, scary, something other people do. As a nation, we under-invest and most are only exposed to the market through their pension. But avoiding risk has a risk too. Inflation can eat away at your savings and you can miss the chance to build wealth."
Golden Rules for Investing
Lewis laid out essential guidelines for novice investors:
- Only invest money you won't need for at least five years.
- Clear any expensive debts first.
- Maintain a cash emergency fund covering three to six months of bills.
He highlighted the potential returns by comparing £1,000 invested ten years ago: the best savings account would have barely kept pace with inflation, while £1,000 in the FTSE 100 would now be worth £2,400. An index tracking global stock markets would have grown to £3,600, and the US S&P 500 would have reached £4,110.
Active vs. Passive Funds
For beginners, Lewis recommended starting with a fund rather than individual stocks. "A fund is a basket of investments that you buy as one. There are active funds, where a fund manager picks stocks to outperform the market, or passive funds, which track an index like the FTSE 100." Experts on the show advised opting for passive funds initially.
Understanding Risk
Addressing concerns from a viewer who had only used cash ISAs, Lewis clarified: "Money in a cash ISA is protected; you get a defined interest rate. With shares or funds, your capital is at risk based on the performance of the assets. If you buy an individual share, you could lose all your money. With a fund, that's unlikely. It may go down, but over time, a diversified portfolio should outperform savings."
