If someone had explained the stock market to me back when I was 18, and told me that it’s entirely possible for a careful investor to accumulate a million over the course of their lifetime… well, I might have a million by now.
Learning about investing in quality companies came relatively late to me and I haven’t quite reached those heady heights, but I am approaching retirement in a significantly better state than I otherwise would.
I use both a Self Invested Personal Pension (SIPP) and an Individual Savings Account (ISA), and I’m focusing on the ISA today because it gives me a very useful tax advantage.
Avoid cash
First, I’ll start by telling you I’d avoid a cash ISA, as their pitifully low typical interest rates don’t even match inflation — and what’s the point of saving tax on an investment that’s guaranteed to lose money in real terms? It’s a stocks and shares ISA for me every time.
Our new 2019 ISA allowance is just two weeks away now, and we can stash away up to £20,000 over the next 12 months and not pay a penny in tax on any profits when we withdraw cash — even if that’s in 40 years time and we’ve accumulated a million or more.
How realistic is the expectation of making a million? I won’t bore you with lots of statistics, but I’ll tell you about a couple of examples I’ve run through my spreadsheet…
Multi-millions
Suppose you’re starting out with your 2019 ISA allowance and can invest the full £20,000 (I know most of us can’t, but this is just to explore the possibilities). If you can get an average annual return of 6% per year from the stock market (which I think is a reasonable target), after 40 years you’ll have smashed the million pound barrier and be sitting on a £3.2 million pot.
You’ll have invested a total of £800,000, so that’s £2.4m profit — and no tax to pay on it.
If you’re among those of us who can’t afford to use up our full ISA allowance, how much will you need to stash away? My calculations suggest you’d need to invest approximately £525 per month for the same 40 years to reach a million. And while that’s still a significant monthly amount, it should be well within the reach of a fair proportion of the population — certainly a lot of people in professional occupations.
Big boost
But even if you can only manage, say, £200 per month, after a lifetime’s career you could still end up with a pot of around £380,000 to set you up for a comfortable retirement.
Trying to time the market is, I think, a mug’s game, but that doesn’t mean you can’t take advantage of attractive investment times when they happen to come along.
And with dividends from top-quality FTSE 100 companies set to reach record levels this year, my feeling is that 2019 really could be a great year to get started on a lifetime of profitable investment.