One of my plans for next year is a lot like my plan for this year. That is to take advantage of the ability to invest in a Stocks and Shares ISA then use it to try and build long-term wealth. To do that, I want to stuff it full with cheap shares.
But I will not just buy shares because they have a low price – by “cheap” I mean buying into quality companies for less than I think they are worth.
Here is the approach I expect to take in 2025 (and beyond, as a long-term investor).
Climbing from zero
Starting with an empty ISA is not necessarily a problem. After all, I can put money into my current ISA until the start of the next tax year, at which point I can take advantage of another year’s ISA contribution limit.
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Here, I will illustrate my approach to building wealth using an ISA that has £20k added to it, whether as a lump sum or through my preferred approach of regular contributions over the course of the year.
To turn a £20k ISA into a £100k next egg will mean me increasing its value fivefold. That is no easy undertaking (to put it mildly).
However, if I take a long-term approach, I think it is possible. Getting down to numbers, imagine I compound my ISA at 10% annually. Its value will top £100k after 17 years.
Why value matters
I could try to achieve that level of compounding through buying dividend shares. Some FTSE 100 shares offer high yields close to 10%.
But dividends are never guaranteed, of course (like anything in the future except death and taxes). But income shares are an important part of my ISA.
Still, I think buying cheap shares (with or without dividend prospects) may be the key to my approach here.
If I buy shares for less than I think they are worth, hopefully over time that price gap could close. Strong business performance may also help push the share price up over the years. On top of that, if I do buy shares that I expect to pay dividends in future, hopefully buying them at a low price could push up my prospective yield.
Hunting for value
You may have spotted a possible flaw with my plan. If the shares I buy are so promising, why are they cheap? All investments involve risk and in some cases my view of risk and reward may be different from that of the market as a whole. That, I believe, is an opportunity.
As an example, consider my investment in Card Factory (LSE: CARD). I only bought this share last month, but it has risen 11% in that short time. It also yields 6.1%.
The long-term picture has been less rosy. A 40% fall in five years has offered me the chance to buy the share at what I see as a cheap price.
That reflects risks, including the possible impact of steeply-rising postage rates may have on the number of cards Britons send.
Still, I think the company’s in-house production capabilities, large network of shops and competitive pricing all help give it a commercial advantage.
To me, the share still looks cheap. I plan to keep holding it.
