The Stocks and Shares ISA is a very powerful investment account. Not only does this type of ISA offer a vast range of investment options, including shares, funds, investment trusts, and exchange-traded funds (ETFs), but it also shelters all capital gains and income from the tax man.
Given this brilliant combination of a wide range of growth assets and no tax, it’s possible to build up a substantial sum of money within a Stocks and Shares ISA over time.
If I was to invest £500 a month, for example, I could end up with a million or more within my account by the time retirement comes around. Here’s a look at how I could generate that kind of money by drip-feeding money into my ISA on a regular basis.
Building a £1m+ ISA
Let’s say I put £500 a month (£6,000 a year) into my Stocks and Shares ISA. And let’s say I’m able to generate a return of 9% a year (more on this below) on my money over the long run.
Running the numbers, I calculate it would take me about 33 years to build up £1m within my account if I was to start from scratch. In other words, if I started saving and investing at the age of 30, by the time I got to 63 (well below the State Pension age), I’d be at the million-pound mark.
Now luckily, I don’t have to start from scratch today. I began saving into my ISA around a decade ago and, since then, I have built up a healthy balance within my account.
I’m still a long way off the million-pound mark. However, I’m on track to get there. If I continue to drip-feed money into my account on a regular basis, and earn a decent return on my capital, I should reach my goal before I retire.
Generating 9% per year
What about the 9% per year return though? How am I going to achieve that kind of return within my Stocks and Shares ISA? Well, I reckon a 9% return is achievable (over the long run) with a diversified mix of high-quality funds, investment trusts, ETFs, and individual stocks.
One fund I’ve invested in is Fundsmith. This is a global equity fund that focuses on high-quality businesses. It’s managed by portfolio manager Terry Smith (who is sometimes called ‘Britain’s Warren Buffett’). Since its launch in late 2010, it has delivered an annual return of about 15.5% (although past performance is not an indicator of future performance).
As for individual stocks, I’ve invested in quite a few. Not only have I targeted high-quality UK stocks like Diageo, Unilever, and Rightmove, but I’ve also invested in high-quality US stocks such as Amazon, Microsoft, and Visa. All of these companies have been good long-term investments in the past and appear to have plenty of potential going forward.
Now there’s no guarantee this approach to investing will generate a 9% return a year, of course. I have to accept that returns can be lower. However, given that the stock market has historically delivered returns of around 7-10% a year over the long run, I feel my investment returns should be attractive.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Ed Sheldon has positions in Amazon, Diageo, Microsoft, Rightmove, Unilever, and Visa. The Motley Fool UK has recommended Amazon, Diageo, Microsoft, Rightmove, and Unilever. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022