Time versus money. It’s a constant internal debate people have with themselves. It could be family versus work, DIY versus paying a professional, or getting rich quick versus playing the long game. Billionaire investor Warren Buffett and his colleague Charlie Munger advocate for the latter. Lifelong investing is the way to make a million, and with the following calculations I’ll demonstrate just how easy it is to become a Stocks and Shares ISA millionaire.
Patience is a virtue
With or without an initial investment, anyone can become a Stocks and Shares ISA millionaire. What’s needed is the right rate of return, a regular investment and patience. Here’s an example, using an achievable 10% annual rate of return. If I make an initial investment of £3,500, followed by monthly investments of £275, I can comfortably become an ISA millionaire within 35 years. That would set me up for a fabulously relaxed retirement.
Some stocks are riskier than others, and sector risk varies too. Generally, the riskier the stock, the higher the reward when all goes well. With some high-performing stocks, the 10% annual rate of return may well be exceeded. This can help speed up the path to millionaire status.
I can achieve Stocks and Shares ISA millionaire status in a shorter time frame with a higher monthly deposit and/or a higher rate of interest. Increasing the initial deposit doesn’t make as much difference to the timeline as regular investments do.
Research for peace of mind
I invest in my financial future by taking the time to research and understand the stocks worth buying. I like to first look for businesses I recognise and understand. The FTSE 100 is a good starting point because it contains the UK’s largest companies. It contains household names such as JD Sports, Hargreaves Lansdown, Rightmove, Rolls-Royce and Ocado. Before jumping in and buying shares, just because I recognise their names, I like to increase my knowledge. I’ll look at their most recent financial statement and trading update. Then, ask myself the following questions:
- Does the company have a lot of debt?
- Does it have a competitive edge?
- What is its price-to-earnings ratio (P/E)?
- Does it offer investors a dividend?
This information can give me a clear sign of the state of the company. If it has a lot of debt, it may struggle in a crisis. If it has a competitive edge, it could thrive in the long run. If its P/E is very high, that could signal it’s overpriced, while very low, might signal problems. Finally, a dividend is a great way to help me create long-term value in my portfolio.
Millionaire mindset
While some investors become millionaires through trading, many fail spectacularly. That’s usually because emotions get the better of them. The great thing about long-term investing is it’s a set-and-forget way to accumulate future riches.
Brokers such as Hargreaves Lansdown allow investors to make regular investments for low or no fees. This means I can invest £100 a month in one stock, £150 in another, and so on. By committing to buying my favourite stock each month, I can enjoy the benefits of pound cost averaging. Although some months I’ll get more shares for my money than others, overall, it will balance out to an average price. With time and patience, I can become a Stocks and Shares ISA millionaire.