Investing regularly in a Stocks and Shares ISA can build substantial wealth over time. In fact, there are almost 5,000 ISA millionaires in the UK, according to the latest available data.
However, not every account is guaranteed to go up. Some can struggle, for a number of reasons.
Here, I want to look at one often overlooked mistake that can — quite literally — be very costly.
Fees and costs
I’m talking about the impact of fees associated with managing ISAs.
Now, some costs are unavoidable, including platform fees and stamp duty (a government tax) on dealing most UK stocks. This is the basic price we all have to pay to invest.
However, some UK brokers still charge customers for trading shares. Most US investors are shocked to learn this, as commission-free trading has been the norm for many years across the pond.
My Lifetime ISA and self-invested personal pension (SIPP) are with an online platform that still charges £5 per trade. So I’m careful not to overtrade. Thankfully though, it seems that trading fees in the UK are slowly going the way of the dinosaurs.
Foreign exchange fees can also be easy to overlook. These are paid on international shares (0.5%-1.5% per transaction, for example).
As we can see, regular trading (particularly with modest amounts) can quickly rack up a load of charges and significantly erode long-term returns.
That’s not all
Investors can also often underestimate the impact of annual management fees charged by funds.
A seemingly small 1% figure can dramatically reduce long-term gains due to compounding. For a £20,000 ISA growing at 7% annually, a 1% fee would cost more than £30,000 in lost returns over 30 years!
Most index trackers have expense ratios under 0.2% nowadays. But it’s always worth keeping an eye on the costs associated with actively managed funds. I try to prioritise low-cost options where possible.
I trust this one
One such fund that I hold is Scottish Mortgage Investment Trust (LSE: SMT). The share price is up 29% in one year and around 79% over five years.
The aim of the trust is to invest in the greatest growth companies in the world. Today, that includes Facebook owner Meta Platforms, AI chipmaker Nvidia, and e-commerce powerhouses MercadoLibre and Amazon.
Scottish Mortgage also gives investors exposure to exciting companies not listed on stock markets. These include internet payments platform Stripe and SpaceX, Elon Musk’s reusable rocket firm.
SpaceX is reportedly set to be valued at around $255bn next month, making it the most valuable private company in the US. Last month, it made history when it sent the world’s largest rocket into space and back, as well as catching the huge first-stage booster with the ‘chopstick’ arms of the launch tower.
The opportunities that reliable Starship rockets would open up in space tourism, exploration and satellite launches are enormous.
One risk investing in Scottish Mortgage is that the portfolio is made up entirely of growth stocks. Were these to fall out of favour, as happened in 2022, the share price would likely underperform.
However, the ongoing charge for the trust is just 0.35%. That’s less than most actively managed rivals and significantly less than private equity funds.
As such, I reckon Scottish Mortgage offers my portfolio excellent value for money.
The post 1 ISA mistake to avoid appeared first on The Motley Fool UK.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Ben McPoland has positions in MercadoLibre and Scottish Mortgage Investment Trust Plc. The Motley Fool UK has recommended Amazon, MercadoLibre, Meta Platforms, and Nvidia. 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.
