Putting a bit of money into a Stocks and Shares ISA for a rainy day is one thing.
But could I possibly use the investment vehicle to try and join the ranks of ISA millionaires? After all, several thousand people already have a Stocks and Shares ISA with a seven figure valuation.
Why shouldn’t I try to join them?
Drivers for long-term wealth creation
If I wanted to try and hit such a goal, I would need to be serious about the approach.
I think that involves a couple of things. I would put a fair amount of money into my Stocks and Shares ISA, for example using my £20K annual contribution limit fully. I would also take a long-term approach to investing.
Imagine that, for a decade, I put £20,000 each year into my ISA. That would get me some of the way towards my million-pound goal. But it would only be 20% of what I needed.
That is why I think it is really important how I choose to invest the money I put into my ISA. That could potentially help me grow its value to £1m.
Outperformance year after year
What sort of shares would I be looking to buy?
I would want to increase the value of my portfolio markedly. So I would aim to select shares that grow strongly in price, pay large dividends year after year – or both.
Whether it comes from share price growth or dividends, my compound annual growth rate would be important when it comes to the speed at which I might turn my Stocks and Shares ISA into a million-pound asset.
If I invested £20,000 annually and achieved a compound annual growth rate of 15%, then my Stocks and Shares ISA ought to be worth a million pounds after 16 years. But of course, I may achieve a much lower return and it would take far longer to get to £1m.
Hunting for winning shares to buy
Although some shares achieve that sort of compound annual growth, many do not.
So, how would I decide which ones to buy?
Past performance is not a guide to what happens in future, but it can provide some useful illustration of relevant principles. Why have companies like Apple, Alphabet and Netflix done so well over the past decade? They each identified a large market of target customers and delivered something unique that made it hard for rivals to compete.
When it comes to dividends, why have companies like British American Tobacco been able to raise their dividends annually for decades? A combination of competitive advantages in a large market, and strong cash flows have helped. Those are the sorts of characteristics I look for when choosing income shares for my ISA.
Being realistic
Investing to build a portfolio worth a million pounds is an ambitious goal – but I do think it is an achievable one.
With the right combination of long-term thinking, careful selection of a diversified range of shares and investment discipline, I could hopefully turn the idea into reality.
