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A Stocks and Shares ISA is a terrific asset for building wealth. Over the long term, investing in equities tends to generate better returns than keeping money in cash.
Investors have to be willing to stay the course and deal with the times when share prices go down. But what sort of reward can they expect for doing this?
10-year returns
The long-term average annual return from a Stocks and Shares ISA is around 9.5%. That rate is more than enough to double the value of an investment over 10 years.
In fact, it’s enough to turn a £10,000 investment into something worth almost £25,000 after a decade. That just hasn’t been possible for someone keeping money in cash.
Cash does have its advantages. The fact that it doesn’t fluctuate the way that share prices do means it’s the best – probably the only – asset that you can rely on for covering emergency expenses.
When it comes to building wealth over the long term though, there’s no contest. Owning shares in profitable businesses using an ISA has been the best way for investors to go.
What to invest in?
Not all stocks do equally well. But the way to try and figure out what to invest in is by looking at the underlying businesses and trying to figure out what their future prospects are like.
The key to this is finding companies that have something that differentiates them from their competitors. And it has to be something that’s going to last for the next 10 years or more.
That means it can’t be something like a product that’s going to go out of fashion, or going to take advantage of a temporary gap in the market. It needs to be more durable than this.
Examples include having a cost advantage, a brand that people recognise positively, or a product that it’s hard for customers to switch away from. And there are a few in the FTSE 100.
Doing things differently
Private equity firms have struggled recently, but 3i (LSE:III) is different. Unlike other companies, it invests its own cash instead of raising capital from external investors.
That means it can look for opportunities, rather than having to buy and sell at specific times. And that has been a huge advantage with interest rates higher than they were five years ago.
The stock has been falling of late because of underwhelming results at its largest investment – a retailer called Action. And this is a big part of 3i’s portfolio, which isn’t particularly diversified.
That creates risk. But even after an 11% drop over the last 12 months, the firm’s unique approach has generated a 652% return for investors since the start of 2016 – well above the FTSE 100 average.
ISA investing
I own 3i shares in my ISA and I’m looking to take advantage of the recent share price weakness to add to my investment. And the reason for this is very straightforward.
The key to the company’s success has been its differentiated approach and this is still very much intact. So I think the challenges are likely to be short-term in nature.
At the moment, 3i’s concentrated portfolio is a risk. But this is something I can look to offset by diversifying my own investments – and this is what I plan to do.
