There’s a lot of uncertainty surrounding the stock market in the short term. But that shouldn’t stop me from having a clear long-term plan for my Stocks and Shares ISA.
And that’s exactly what I’d do right now, especially when I have a target to take it to £1m.
Long-term investing
With an energy and cost-of-living crisis threatening to destabilise households and businesses, many global stock markets have suffered steep declines this year.
But investing should be a long-term activity, in my opinion. Looking back, world economies have been through many recessions, wars and other periods of uncertainty. Yet the average annual FTSE 100 return over many decades is around 8%.
By investing regularly over the coming decades, I would hope to achieve at least that level of performance. Bear in mind that in some years, stock market returns will lag and be disappointing. And future returns come with no guarantees either.
That said, there are dozens of shares that perform far better than the average. If I plan to invest £250 a month for the next three decades, I calculate I could reach £1m if I achieve an average return of around 14%.
Almost 25% of FTSE 100 shares managed this over the past 10 years. By doing some homework, I aim to find the next group of high achievers and add them to my Stocks and Shares ISA. I have to accept, however, that 14% is an ambitious return figure and I might need to increase my monthly investment amount.
How to find the best stocks
I have a list of criteria that I use to determine what a good investment might be. First, I look for high levels of profitability. To me that means double-digit profit margins and return on capital employed. I’d consider this to be the best measure of a high-quality company.
Next, I like to see steady sales and earnings growth. Sharp ups and downs could lead to a volatile share price. I’d rather own shares that smoothly move up over several years.
As a long-term investor, I only want to invest in companies that I think will be able to sustain a competitive advantage over many years. Expert investor Warren Buffett referred to this as a ‘moat’. It’s sometimes achieved by a strong brand or patent.
Lastly, I prefer to own stocks that have strong underlying long-term trends. For example, this could be linked to population growth, home ownership, or medical needs.
Options for my Stocks and Shares ISA
Right now, there are several options that meet my criteria. Many of their share prices have tumbled this year, along with the rest of the market. But that could create an opportunity to pick up these potential long-term winners at a discount.
For my ISA this year, I’d be happy to add Ashtead, Howden Joinery Group, Experian, RELX and Diageo.
Bear in mind that near-term uncertainties for these shares could continue and stock prices could still fall over the coming months. But by drip-feeding £50 a month into each pick, I would potentially lower my average buying price if that were to happen. Overall, this is the kind of automated plan I’d implement to help me become an ISA millionaire.