My Stocks and Shares ISA is a great tax-efficient tool for me to use when investing. It allows me to not pay tax on capital gains or dividend income incurred from my activities in the ISA. Each year, I can put up to £20,000 in my ISA (if I have it) and buy stocks with it. Given the stock market volatility this year, I think there are some smart buys that could make me a rich man in the future.
Value stocks for long-term gains
The first area that I think I can find some bargains is with heavily sold stocks. For example, in the FTSE 100 there are currently 15 that have fallen by at least 30% in the past year.
I’m not claiming all of these are going to be good options. Some, such as Ocado Group, have been sold for good reason (in my opinion). However, there are others that I think have simply been caught up with negative investor sentiment. This includes JD Sports Fashion and the Scottish Mortgage Investment Trust. Both are on my watchlist to buy with spare cash.
Despite the sell off recently, both options have performed well in the past. Over a longer, five-period, both stocks are up over 70%. The average annualised growth rate for the two is 15.1%.
My aim here is that over time, stocks that are undervalued should return to a fair value. I talk about long-term gains because this process can sometimes take a long time! However, with my aim of becoming a millionaire, I’m accepting that it’s not going to happen overnight.
Growth stocks compounding returns
Another area that I’m going to target for my ISA is growth stocks. These are typically young companies in fast-growing sectors. For the past few years, tech has been the place to be for growth stocks. 2022 hasn’t been a good year for such stocks in general. though, with lower global growth making many cut revenue and profit expectations.
Despite this, having a wider view helps me to understand why growth stocks are still a great addition to my portfolio. For example, the Amazon share price is down 44% in the past year. Yet even with this, over five years it has still gained 74%. This is an annualised growth rate of 14.8%.
It’s risky to buy a growth stock if I’m thinking to hold a share for a few months. The high volatility in the share price could force me to book a loss. However, when I’m considering my ISA, I’ll be buying for years to come. If I’m able to sell for a large profit, the benefit of not paying capital gains tax will help me significantly.
A seven-figure Stocks & Shares ISA
I acknowledge that it’s going to take some years before I can realistically look at an investment pot of a million. However, by mixing in growth and value stocks, I can speed up the process.
For example, if I use £15k of my ISA allocation each year and assume an average growth rate of 8%, I’d reach my goal after 23 years. This assumes I’m starting from zero (which I’m not), so it could happen quicker! But I also have to accept that it might be slower, or never happen, if my investments make a loss.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.