If I invest £100 per week for 20 years, the returns I could get could be greater than the amount invested. That’s because it could earn an annualised return of around 8% by investing in the stock market. After 36 years, one could hold a £1m ISA.
Indeed, studies have shown the return from shares in aggregate over a long period of time have been in high-single-digit percentages when annualised. Often, illustrations use the 8% figure.
I admit 8% doesn’t sound like much of a return. Okay, it’s far better than the returns I can expect from any cash savings account. But how will it make a £1m ISA? The answer is in the way compounding the gains accelerates returns over time.
How to compound my way to a £1m ISA
The process of compounding just means leaving all the gains invested so they can earn further returns along with the money put in. If I do that, returns will grow exponentially. And that means the returns will accelerate and get bigger over time.
And it’s amazing how those returns could grow. I plugged the numbers into an online compound interest calculator. The computation revealed that after 20 years of investing £100 per week I would have put in a total of £104,000. But by earning an annualised return of 8% over that 20 years, total returns would be around £144,151.
Isn’t that astonishing? After 20 years of investing £100 a week in a Stocks and Shares ISA, I could have an investment pot worth £248,151. And the calculator told me that if I keep doing it for 36 years, a pot would be worth just over £1m. In all, I will have paid in £187,200 but earned total returns of just over £827,000!
|
Years |
Total deposits |
Total returns (annualised 8%) |
Investment pot |
|
20 |
£104,000 |
£144,151 |
£248,151 |
|
36 |
£187,200 |
£827,000 |
£1,014,200 |
And that’s why so many people are keen to invest their money. It’s also why the number of ISA millionaires in the UK keeps rising. But what are the practicalities of setting up a programme of investment to aim for an outcome like this illustration?
Trackers, investment trusts, funds and shares
I’d begin by translating my £100-a-week investment into the monthly figure of just over £433. Indeed, many people receive their wages in monthly instalments, so it’s therefore easier to set up a monthly transfer into a Stocks and Shares ISA.
To start off my investment programme, I’d consider capturing those annualised returns by investing in low-cost index tracker funds such as those following the fortunes of the FTSE 100, FTSE 250 and America’s S&P 500 indices. Share funds are great because they offer diversification across many underlying shares. They also have investment thresholds as low as £25, ideal for accommodating one’s monthly investments.
Within a ISA, I could also consider managed funds, investment trusts and the shares of individual companies as funds grow. Many investors do that in the pursuit of higher annual returns.