When you start investing in a Stocks and Shares ISA, it can feel like not much is happening in terms of growing your wealth. It takes a few years for compound gains to really start working their magic.
Look at a chart of your projected net worth and by year five, not that much is happening. By year 10, the line really starts to bend upwards. By year 15, things are hotting up. And by year 20 if you stay invested? That’s when your portfolio really starts to rocket.
I’m 38 now, so if I’m lucky, I’ll be hanging up my laptop and retiring at some time around 2050. If I’m unlucky, and UK government debt goes the way of Greece, it could be a lot longer.
Stocks and Shares ISA makes sense
In any event, I’m sticking to a plan of modest growth at the lowest possible risk. I won’t have grafted my entire life to see all my hard work go up in smoke on a series of daft bets.
When you’re desperate to get rich quick, that tends to be the point at which you lose the most. You start taking crazy risks, investing your entire net worth in a ‘sure thing’, buying terrifyingly volatile trendy stocks, or shares in unprofitable mining companies.
My best shot at achieving a £1m Stocks and Shares ISA is to keep hold of my best FTSE 100 shares, like Scottish Mortgage Investment Trust. I’ll likely hold my favourite FTSE 250 long-term growth stocks, like Games Workshop, too. I may add a few government bonds and maybe some high-profit AIM stocks, like Team17, for a little bit of excitement.
By taking the long view and gently compounding wealth over time, I think can still invest my way to a million quid. It’s not so rich I can light my cigars with tenners, but it’s a healthy chunk of change and a reasonable goal.
How to get there
Say for example I open a Stocks and Shares ISA tomorrow. If I’m sensible, I’ll have six months’ worth of my salary in a savings account for emergencies. But otherwise, my investing journey starts with zero pounds.
I’m keen to get started, so I’m going to add the maximum amount allowed to my Stocks and Shares ISA every month. The limit as of May 2020 is £20,000 a year. That’s £1,666.67 each month. Or about £416 a week. If I stop spending so much on beer and late-night Amazon purchases, I can make it work.
At a 10% annual return on my investment it will only take 21 years to reach the magic £1m figure.
If I had placed all this money in a Cash ISA instead, it would take — at current rates of 1.4% interest — 40 years of constant saving to reach the magic seven-figure sum.
Most investors would be more than happy with 10% consistent annual return over two decades. But say I don’t manage it. Let’s say instead that I get a more conservative 6% annual return. It would take 26 years. That’s still a reasonably long time. But I’ll still be growing my wealth much faster than the four decades of grind with a Cash ISA.