How an early investment could benefit you in the long-term

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Investing early can prove to be advantageous later in life and tax-efficient investing in the form of Stocks and Shares ISAs or Junior ISAs (JISA), could make your money work a lot harder for you than it would in a traditional savings account.

A Stocks and Shares ISA allows you to build a tailored investment portfolio that takes advantage of the long-term potential of the stock market, without paying any tax from the income you earn. For the 2020/2021 tax year, you can invest a maximum of £20,000 into a Stocks and Shares ISA, which you can choose to invest in a range of bonds, equities, property and private equity.

Much like a standard ISA, a Junior ISA allows the account holder to invest for their children’s future and benefit from returns on their investments completely free of tax, however, they can only access the funds once they turn 18. This makes a JISA a great option for further education, or purchasing a car or perhaps a deposit towards their first house. 

Let’s talk about risk

Past performance is not a guide to future performance. The value of all stock market investments can go down as well as up and you may not get back the full amount originally invested. 

How to invest

Visit our How to Invest page where you’ll find all the information you need to start your investment journey with BMO. 

Starting early 

Both Stocks and Shares ISAs and Junior ISAs are seen as a long-term investment and benefit from time, therefore the earlier you begin investing, the better off you are likely to be in the long-term. Investing earlier means that your money is working for longer, with the potential of earning capital growth and dividends over an extended time period.

Like all investment products, however, an investment comes with a certain amount of risk. It’s important you take the following risks into consideration before you invest:

  • The value of your investment can go down as well as up
  • The level of risk will depend upon the underlying investments that you choose to hold in the ISA/JISA
  • You need to be comfortable that you may not get back the original amount invested
  • Tax allowances and the benefits of tax-efficient accounts are subject to change and tax treatment depends upon your individual circumstances 

A long-term strategy

It’s no secret that investing money can be a worthwhile long-term strategy for providing security later in life. The Barclays Equity Gilt Study revealed that investments such as ISAs and equities have outperformed cash savings over most 10-year periods, and the potential returns only increase as time goes by.

In short, the longer an investment has time to mature, the higher the likelihood that it will continue to grow. As such, a Junior ISA could offer your child a certain level of security once they come of age – a time when they often need such security the most.

A Junior ISA (JISA) allows you to invest up to £9,000 a year for your child for the 2020/2021 tax year – more than double the previous £4,368 limit. As soon as your child reaches their 18th birthday, their Junior ISA automatically matures and becomes a Stocks and Shares ISA. They are then free to withdraw their funds, or, can keep it as an investment in the hope that it could continue to grow.

Early-bird investment advantages

Investing later is better than not investing at all, but as the value of your stocks typically increases over time, the old cliche that the early bird catches the worm couldn’t be any more accurate, this is largely due to the process of compounding and smoothing.

Here’s how that works:

Compounding

In a nutshell, compounding is the ability for you to benefit from potential returns on both your original investment and any previous growth in that investment. Therefore, the earlier you invest, the longer your money has to benefit from compounding. It can be best explained using the snowball rolling down a hill analogy.

As the snowball rolls down the hill, it not only gathers more snow and grows in size but increases surface area as it descends the hill faster and faster. This is how your Stocks and Shares ISA could work, just so long as the funds remain largely untouched and unaffected by any of the usual risks associated with investing.

Reinvesting your dividends

Whilst it’s true that not all investment funds and shares pay dividends, many do pay out a regular income. Choosing to reinvest these regular payments can make a significant impact on your long-term investment.

Figures shared last year from Hargreaves Lansdown demonstrate the power of reinvesting dividends. They compared how two £1,000 investments made in 1985 on the FTSE 100 had fared in 2019; the investment that had taken dividends as cash had grown to just over £5,000, but the one that reinvested dividends had grown to just under £20,000.

These figures demonstrate the power of compounding and serve as a reminder that you’re more likely to see significant growth if you start early and continue reinvesting over time. That said, it’s important to remember that you cannot rely on past performance to predict the future value of your investment.

Smoothing

Anyone that keeps a close eye on the stock market will tell you how stressful it can be to constantly monitor its continuous ups and downs. The volatile nature of the market dictates that whilst you could see a new investment rapidly go up, it can just as easily drop back down too.

Smoothing is something that benefits early bird investors who invest regularly over time, making those nasty bumps easier to ride out. This is because they have been making investments over an extended time period at all stages of the economic cycle. 

For example, when the stock market is down, your regular investment will buy more shares and fund units, and when the market is up, it will buy less. 

Achieving your goals

The thought of investing enough money to go towards your retirement or child’s education might seem daunting, however, early bird investing can provide you with a more affordable solution. The earlier you begin investing, the more likely you are to see the benefits of compounding and smoothing, especially when reinvesting your dividends. The flexible nature of an ISA/Junior ISA allows you to begin with smaller regular investments, which can be increased if your salary and disposable income goes up over time.

How to start investing early

Once you’ve made the decision to invest, it’s important to take a few things into consideration before you open the account.

  • Decide how much to invest – You can invest from as little as £50 a month into your ISA (or £30 with a JISA) or begin with an up-front contribution of up to £500 (remember, you can increase or decrease payments as time goes by).
  • Learn about your investment options – You can choose from different investment trusts with BMO, including UK & European companies, global companies and property. Find out more about our Investment Trusts.
  • Pick an investment strategy that works for you – Our Investment Trusts offer a range of investment opportunities, including access to property, equities, bonds and private equity. Each trust comes with different risk factors, so be sure to weigh up the pros and cons of each before investing. 

Learn more about the BMO Stocks and Shares ISA and BMO Junior ISA, where you’ll find everything you need to consider your options and make an application. As always, remember to consider the risks beforehand as you may not get back what you originally invested.

Further reading

For further news and industry insight on investments and the stock market in general, head over to our Helpful Articles. Looking to cut through the jargon? Our glossary has been designed to transform common financial terms into easy-to-digest plain English.