How could we make a million from a Stocks and Shares ISA?
Well for me, the best way would be to start about 35 years ago. That’s what most of today’s 4,000 ISA millionaires did, back in the days of PEPs.
Clearly, I can’t do that. I didn’t start until quite a bit later.
But I’ve been doing some sums on how long it might take to make a million.
And it’s quite an eye-opener to see just what difference it can make for younger investors to start as soon as they can.
Use the allowance
One key way to make the most from a Stocks and Shares ISA seems clear. It’s to put in as much as we can in the first place.
A good few of the UK’s ISA millionaires were able to use their full contribution limit each year, currently at £20,000.
But, we could still make an ISA million with a good bit less cash than that. It just needs the magic ingredient of time, coupled with compounding.
And the early years matter the most. In fact, investing early can make a huge difference.
First million
In the past 10 years, the average Stocks and Shares ISA return has come in at about 9.6%, and I’ve been doing some sums with that.
Now, I doubt ISAs can do that well in the very long term. There are risks, and some years they’ll even lose money. But it’s a good enough figure to use for my comparison.
Let’s take someone investing £200 per month, getting that 9.6% per year, and ploughing their dividend cash back in every year. They could have a million, lovely, tax-free pounds in 40 years.
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Two decades
After the first 20 years, they’d be at only £138,000, way less than half their 40-year total.
And here’s where it gets interesting.
Suppose our ISA investor then stopped. For the next 20 years, they didn’t add a penny in new money, but just reinvested their dividend cash. And kept getting the same return.
At the 40-year mark, they’d have more than £860,000 in their ISA. In the second 20 years, their £138,000 would still have multiplied sixfold, without any new money being added.
Now, here’s where it gets really interesting.
What about someone who didn’t start until the 20-year mark, after our first would-be millionaire stopped, and then stashed away £200 a month for the rest of their life?
Well, they’d reach their million in another 40 years. But the one who started earlier and then stopped after 20 years… would by then have more than five million!
Even 200 years later, the first starter would still have around five times the money.
In fact, the catcher-up could, erm, never catch up.
Not in a millennium
No, investing £200 a month at 9.6% for 20 years, and then not putting in another penny for the next thousand years… would still beat starting 20 years later and investing £200 every month for a millennium.
And that is why it pays to invest early.
The post What’s the best way to turn an empty Stocks and Shares ISA into a million? appeared first on The Motley Fool UK.
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Views expressed 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.
