I used to think building a £1,000,000 net worth was impossible for those of us with normal jobs. But for anyone with the right knowledge who can save regularly, I’d say it’s a realistic goal for a Stocks and Shares ISA.
In my view, there are two crucial steps to follow. By understanding them, I hope to invest my own ISA to a £1m net worth.
The eighth wonder of the world
The first ‘secret’ is how mind-bogglingly powerful compound interest is. It’s something no one seems to realise.
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Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it”.
A simple example can show this neatly. If I had £10,000 and got 10% interest over a year, then it turns into £11,000.
Now, let’s say I get the 10% again. My £11,000 has turned into £12,210. Two years in, and it doesn’t seem like I’m building wealth that quickly.
Here’s the thing though. Over 30 years, the £10,000 becomes £174,494. Over 40 years, it’s £452,592. Over 50 years, it’s now £1,173,909. That’s the million-pound target right there from just £10,000 and adding nothing else.
The trick here is that I’m getting ‘interest on the interest’. This makes the growth exponential which becomes absurdly powerful over time.
10%+ returns
The second ‘secret’ is to understand the superb returns that investing in stocks can offer.
The companies I invest in are on leading UK and US exchanges. The historical percentage return – including dividends and share price increases – for these indexes like the FTSE 100, FTSE 250, or S&P 500 is around 8%-10% per year. And that’s even taking into account stock market crashes like 2001, 2008, or 2020.
For example, cigarette seller British American Tobacco (LSE: BATS) has an excellent compound annual growth rate of 13.5% going back to 1995. A £10,000 stake back then would have snowballed into roughly £340,000 today.
Receiving this kind of return from stocks will compound in much the same way compound interest does. And this is how I hope to hit the £1m figure in my Stocks and Shares ISA.
Not for the faint of heart
It’s important to point out that investing like this is not for the faint of heart.
A big problem is the risk of choosing poor stocks. For example, the annualised return of insurance and financial services firm Aviva (LSE:AV) was an underperforming 2.6% since 1995. A £10,000 stake here would have increased to only £21,700 in 28 years.
Worse still, the internet is full of stories of people who couldn’t deal with seeing their net worth drop in 2008 and sold all their holdings.
The market rebounded from that crash, but anyone who sold at the bottom out of fear would’ve lost out massively.
My strategy
Personally, I think investing in businesses is easily the best option to grow my wealth, despite these risks.
So I plan to continue to put my savings into quality companies and enjoy the returns from compound interest.
Hopefully, this strategy will grow my Stocks and Shares ISA to the million-pound mark or even higher.
