Becoming a Stocks and Shares ISA millionaire is not as impossible as many believe. By consistently investing spare capital each month, even novice investors can take advantage of the wealth-building effects of compounding. And best of all, providing an individual is patient, it doesn’t need much money to get the ball rolling.
The latest data from the Office for National Statistics reveal that the average household savings rate currently stands at 9%. Pairing this with the average salary of £32,700 indicates that full-time workers save roughly £245.25 per month. But what would happen if this money was invested in the stock market instead of placed in a savings account?
Being patient
The stock market can be a volatile place. But this risk has the potential for significantly higher returns versus savings instruments and other asset classes. The FTSE 250 is a prime example of this. During the 2022 correction, the UK’s second flagship index fell by as much as 30%! And yet, when taking a long-term perspective, its average annual return still stands at a gain of 10.6% since its inception in 1992.
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Over long time frames, stocks as a whole trend upward. While not every business survives the journey, investing in a broad index for years or even decades can take advantage of this positive momentum. Even if another crash or correction were to occur, given sufficient time, a diversified portfolio of high-quality businesses is highly likely to recover in the long run before eventually reaching new record highs.
In fact, this is exactly what’s just happened with the FTSE 100. And based on the current trajectory of the FTSE 250, it may not be too far behind.
An investor capable of injecting just £245.25 each month into their Stocks and Shares ISA to invest in a low-cost FTSE 250 index fund can replicate its future returns with minimal effort. And assuming the index continues to deliver its historical average returns, a portfolio starting from scratch would enter millionaire territory within 35 years.
Needless to say, that opens the door to a far more comfortable retirement.
Investing vs saving
On average, even after the recent interest rate hikes, UK savings accounts offer around 3% returns. And at this rate, it would take roughly 81 years to reach £1m. And that’s assuming rates don’t get cut again once inflation has returned to an optimal level.
So, does that make investing the far better approach to building wealth? Not necessarily. Why? Because saving has a massive advantage, it’s practically risk-free beyond a bank going insolvent. On the other hand, investing can be a bit of a rollercoaster ride.
Even if the FTSE 250 continues to provide a 10.6% average (of which there is no guarantee), 35 years is plenty of time for multiple crashes and corrections to occur. Depending on the timing of these events, an investor could have considerably less than expected in 2058. And suppose all their savings have been injected into the stock market. In that case, any unexpected expense during a period of market volatility could force them to sell shares at a terrible price, destroying their wealth.
That’s why investors should seek to leverage the power of a Stocks and Shares ISA but also ensure they have sufficient cash savings to protect themselves against the worst-case scenario.
