I use a Stocks and Shares ISA as my preferred way to invest for the future. Although it’s usually possible to buy many financial instruments within this tax wrapper, I tend to focus on owning its namesakes, stocks and shares.
With thousands of shares available, which ones work best for my goal? That’s what I’d like to answer today.
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Stocks and Shares ISA millionaire?
A £1m Stocks and Shares ISA might seem like an unreachable goal. And if I wanted to get there by next year, it certainly would be.
But the key to successful investing is to focus on the long term, in my opinion. Having a sufficiently long time horizon would allow my shares to grow.
The average stock market return is around 8%-10% per year. That’s across many decades of history. Bear in mind that past returns can’t guarantee what it will be in the future, but I use it as an estimate.
When I crunch the numbers, I calculate that if I invest £300 a month, I should reach my £1m goal within 35 years. It might sound like a very long time, but there are several strategies I could use to shorten it.
Speeding up the process
First, I could increase my monthly investment. Doubling it to £600 a month could enable me to reach my goal seven years earlier.
Alternatively, I could try to earn more than the average stock market return. Looking at the FTSE 350 index, I note that 14 shares achieved at least a 20% annual return over the past decade.
If I can match that, I’d expect to reach £1m within 22 years. That’s 13 years earlier than the original estimate.
Finding the best shares
When looking at the top performing shares over the past decade, there are several features that many have in common.
First, I note that many exhibit a high return on capital employed. This measure looks at how efficiently a company uses its money, or capital. I’d look for figures over 15% to find high-quality companies.
Next, the best performing shares aren’t typically the largest companies. A decade ago, many would have been small or medium-sized businesses.
That makes sense, as smaller companies can often grow faster. A popular investor, Jim Slater once coined the phrase, “elephants don’t gallop” to highlight this phenomenon.
However, smaller companies can be more volatile and could have wider swings in share price. But as I have a long time horizon, I should be able to withstand this volatility.
Top stocks
So which shares meet these criteria? With this year’s stock market weakness depressing share prices, there are currently several potential candidates.
For a new long-term Stocks and Shares ISA right now, I’d buy Softcat, Plus500, Games Workshop, Big Yellow Group, and IG Group.
On average, these five shares offer a return on capital employed of 50%. They also all produce a double-digit profit margin. That all sounds mighty appealing to me.
