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  /  Editor's Pick   /  Here’s how I’d invest £50 a week in a Stocks and Shares ISA in 2023

Here’s how I’d invest £50 a week in a Stocks and Shares ISA in 2023

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Using a Stocks and Shares ISA to build an investment portfolio can prove quite lucrative in the long run. After all, this special type of brokerage account completely eliminates taxes for British investors. But for those just starting out on their investing journey, building a portfolio can be quite daunting.

Yet, with as little as £50 a week, even novice investors can accrue a large nest egg. Let’s explore how.

Investing small sums

Investors have a wide variety of choices when picking brokerage accounts. And this increased level of competition has worked wonders in bringing down commission fees. Today, it costs around £10 per transaction with an average discount rate of roughly £5, if a regular investment plan is used.

But this quickly highlights a problem. Assuming an investor can execute their trades at £5, a £50 investment would need to generate a minimum 10% return before things even break even. That’s why it’s best not to invest £50 a week, but rather let it accumulate into a more significant lump sum.

Waiting a month to invest £200 with a Stocks and Shares ISA reduces the break-even threshold to 2.5%. This not only means wealth is generated faster, but also less capital is gobbled up by commission charges.

To put things in perspective, investing every week in this scenario would result in £260 being paid to the broker in a single year. However, by investing every month instead, this bill drops to £60. That’s an extra £200 being put to work generating long-term wealth.

Investing prudently

As we’ve seen in 2022, the stock market can be quite a volatile place. And while volatility is not entirely avoidable, diversification can diminish the effects.

By owning a wide range of high-quality enterprises, the impact on an investment portfolio, should one fail, can be significantly reduced. Therefore, an investor can allocate £200 each month to add a new top-notch business, steadily diversifying their portfolio over time.

While there is some debate, a diversified Stocks and Shares ISA usually contains at least 20 companies. But buying shares in a single business each month could take a while to reach this state. Fortunately, there is a shortcut.

As an alternative to picking individual stocks, investors can opt to buy shares in an index fund. Using this financial instrument, it’s possible to own a small piece of every business within the underlying index in a single transaction. And while annual management fees exist, index trackers are notoriously cheap.

The end result is an instantly diversified portfolio matching the stock market’s 8-10% historical performance without swallowing a massive trading commission bill.

Of course, index investing, just like stock picking, isn’t risk-free. Case in point, over the first 10 months of 2022, the FTSE 250 tumbled by nearly 30%!

Crashes and corrections are an inevitability on an investing journey. And they often send many portfolios into a tailspin. But, over the long run, the stock market has a perfect track record of recovery before reaching new highs.

Therefore, even within these frustrating and stressful periods of volatility, consistently drip-feeding capital into a Stocks and Shares ISA can lead to impressive long-term wealth… for patient investors.

The post Here’s how I’d invest £50 a week in a Stocks and Shares ISA in 2023 appeared first on The Motley Fool UK.

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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.

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.