Making £1m in a Stocks and Shares ISA with only £750 a month may seem a little farfetched. That’s especially true, considering the recent bumpy ride the equity markets have been.
The short-term future of shares is clearly shrouded in uncertainty, given the ongoing economic problems facing the UK. However, in the long run, these issues are fairly negligible. After all, the stock market has a 100% track record of completely recovering from even the worst financial crises before reaching new heights.
Therefore, now could be the perfect time to start ramping up a portfolio while stocks are still cheap. In fact, doing this consistently every month can eventually lead to a millionaire territory. Here’s how.
Understanding the power of compounding
Looking at the FTSE 250, the UK’s growth index has delivered average annual returns of around 10.6% since its inception in 1992. It’s certainly been a volatile ride, with multiple crashes and corrections occurring during these 31 years.
But any investor who continued to top up their Stocks and Shares ISA each month at this rate of return is likely sitting on a tidy sum. In fact, investing £750 a month at this rate of return for three decades translates into a portfolio worth £2.15m!
Assuming the FTSE 250 continues to deliver these double-digit gains for the next 31 years, investors drip-feeding capital today could be in a far superior financial position in the long run. But with stocks currently trading at a discount, it might be possible to unlock even higher returns. And picking individual stocks instead of an index fund pushes this potential even further.
Even if a hand-crafted portfolio only musters an extra 2% in annualised gains, that’s enough to push the portfolio value up by another £1.25m, to a total of £3.41m!
Picking the right stocks for an ISA
The Stocks and Shares ISA is a fairly flexible investment account. Most grant access to the entire London Stock Exchange as well as international stock exchanges like the Nasdaq in the US. In other words, investors are spoilt for choice regarding where they can put their capital to work.
But just because it’s possible to buy shares in almost any company doesn’t necessarily mean that’s a good idea. In fact, most businesses either outright fail to meet expectations or run out of steam, dragging down a portfolio’s returns.
As such, a poorly constructed portfolio will likely struggle to match the returns of the stock market average, let alone beat it. It could even end up destroying wealth. And investors may end up with significantly less than expected when the time for retirement comes along. So how can investors avoid this pitfall on the path to becoming a millionaire?
Risk can never be entirely eliminated when it comes to investing. That’s because too many external factors are at play that investors and companies have no control over. However, that doesn’t mean risk can’t be reduced, or mitigated.
Carefully investigating and analysing a business can highlight strengths. But it also often reveals the weaknesses ahead of time, allowing investors to keep an eye on the most prominent threats.
