Investing in a Stocks and Shares ISA gives me a wonderful chance to grow my money tax-free over the long term. So it’s no surprise that these investment vehicles have become immensely popular in the UK in recent years.
In fact, according to comparison site Finder, around 3.5m Brits subscribed to a Stocks and Shares ISA in 2021. That was up from from 2.4m in 2019.
And the latest data reveals there are around 2,000 ISA millionaires in the UK today. Presumably, these are people who have religiously invested the full annual allowance for many years. They’ve taken the long view, which is what Foolish investing is all about.
So, taking a leaf out of the long-term investor’s playbook, how many years could it take me to reach a seven-figure portfolio?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
The maths
The annual ISA allowance for the current tax year is £20,000. Based on my calculations then, it would take just under 20 years to reach millionaire status investing the full annual allowance from today.
That’s due to the power of compounding, a mathematical force where interest is earned upon interest. Here’s a simplified version of this in action, assuming a 9% return (an assumption I’ll get to shortly).
Year
Amount invested
Total
1
£20,000
£20,000
5
£20,000
£120,605
7
£20,000
£186,170
10
£20,000
£309,435
15
£20,000
£605,082
17
£20,000
£765,804
19.5
£20,000
£1,002,025
Data: The Calculator Site
In this example, a staggering £622,000 of the total amount would be attributable to the power of compound interest!
This is like a small snowball — picking up pace with each £20k added — until it eventually becomes a massive one.
Caveats and assumptions
There are a few things I should point out here. Obviously it would be nice to see my portfolio gain 9% consistently every year, but that’s not how the stock market works. In practice, the returns vary significantly from one year to the next.
So the 9% figure I’ve used here is based on historical averages across a number of indexes. For example, the long-term annualised total return (that is, with dividends reinvested) of the S&P 500 is around 10%.
Meanwhile, the total return of the FTSE 100 is around 7% over the last 20 years. However, the mid-cap FTSE 250 index has delivered an average annualised total return of 10% since inception in 1992. Again, that’s with dividends reinvested.
Why am I blending the average returns here then and not using a single index? Because it’s likely that an average UK portfolio contains stocks from most if not all of these indexes.
I know my own ISA does. I have FTSE 100 dividend-payers like Glencore and National Grid, as well as FTSE 250 shares such as Games Workshop. But then I also have many US stocks, including Visa and Nike.
The reason I invest in individual stocks such as these is because I’m trying to beat the index average. This makes investing riskier and more time-consuming, but does give me the potential to generate superior returns over the long term.
As always though, the ingredients to becoming an ISA millionaire are time, patience, consistency, and finding the right stocks to invest in.
The post Could I become a millionaire within 20 years investing in a Stocks and Shares ISA? appeared first on The Motley Fool UK.
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Ben McPoland has positions in Games Workshop Group Plc, Glencore Plc, National Grid Plc, Nike, and Visa. The Motley Fool UK has recommended Games Workshop Group Plc and Nike. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
