I’m planning to build a £1m nest-egg using a Stocks and Shares ISA. According to my figures, it’s possible to hit this target with an initial investment of just £20k. However, the investment strategy used can make all the difference. And that’s where I plan to do things a little differently.
Building a Stocks and Shares ISA portfolio
According to research, many investors make some serious mistakes when they’re building their portfolios. Research shows that investors tend to take too much risk and trade too much. These mistakes severely hold back performance in the long term.
Investors also overlook the impact of costs on their wealth. For example, some wealth managers can deduct total charges of as much as 1.9% a year on top of hefty entry charges, which can be as much as 6%. These charges combined mean an investor would have to earn a return of 7.9% in their first year to cover fees.
Over the past three decades, the FTSE 100 has yielded an average annual total return of 8%. This would cover costs, but I’d rather keep the money than pay it out to advisors.
Considering the above factors, the strategy I’m using for my Stocks and Shares ISA is simple. I’ve acquired a handful of investments, including single stocks and low-cost tracker funds, which I plan to hold for the long term. I believe this approach will help me reduce risk, reduce trading activity, and keep costs low.
The components
There are two parts to my Stocks and Shares ISA portfolio. The first part is a basket of low-cost tracker funds. Tracking indexes like the FTSE 250 and FTSE 100 is an easy way to build a portfolio quickly with the lowest cost possible. Some tracker funds charge less than 0.1% per annum in fees. This means I get to keep more of my money.
However, the one drawback of these funds is they’re only designed to replicate the performance of the market. So, it’s improbable the fund will outperform the market.
With that being the case, I’ve added a basket of high-quality blue-chip stocks alongside these funds in my portfolio. This basket includes household-name stocks such as Unilever and Reckitt Benckiser. With their size and substantial competitive advantages, these companies have an impressive track record of producing double-digit annual returns for shareholders.
And with these companies in my Stocks and Shares ISA portfolio, I reckon they have the potential to produce returns of 8-10% per annum in the long run. At the high end to this projection (10%), my calculations suggest it would take 40 years to build a £1m nest egg with a £20k pot to being with.
What’s more, by adding an additional contribution of £100 a month, I reckon it would be possible to hit this target five years sooner. With an additional monthly contribution of £200, I calculate it would take just 30 years to build a £1m Stocks and Shares ISA.