Like many people, I use a Stocks and Shares ISA as a vehicle for long-term investment.
But how much can an investor earn using that approach?
Understanding the four variables
There are four things that produce the answer to that question and I will explain each in turn below. They are the amount invested, share price movement, dividends, and costs.
Variable one: amount invested
This may sound easy, as I have already specified a £20k ISA as my example.
But along the way, if dividends were received, an investor would have a choice. They could receive them as cash, or they could keep them in the ISA wrapper to reinvest (known as compounding).
So a £20k ISA could end up having more than £20k invested through it, without the investor putting in a penny more after the initial amount.
Variable two: share price movement
This one is pretty simple to understand. If share prices go up, the ISA could be worth more a decade from now. If they go down, it could be worth less.
That explains why it is not always enough to stuff a Stocks and Shares ISA with brilliant businesses. It also matters how much an investor pays for them.
Variable three: dividends
As I mentioned, dividends could boost the long-term value of the ISA either as cash sitting in it, or reinvested in more shares.
Variable four: costs and fees (even small-seeming ones!)
Something that can be forgotten (but should not) is that the fees and charges associated with a Stocks and Shares ISA can eat into returns.
Is 2% a lot?
It might not sound it. But consider this: a 2% commission annually on £20k would have cost an investor over £3,600 after a decade.
Choosing the right Stocks and Shares ISA can therefore be a key determinant of how it performs.
Long-term wealth creation
Imagine an investor has an ISA comprising shares that on average produce 10% compound annual growth.
That would be a combination of share price gain, dividends (and compounding), and the negative effect of ISA supplier costs and fees.
After a decade, that ISA would be worth around £51,870. Not bad at all!
Finding shares to buy
That example depends on finding shares that deliver 10% compound growth annually on average, after ISA costs.
One share I own that I hope might manage to do that is FTSE 100 asset manager M&G (LSE: MNG). Its dividend yield is 9.5% and the firm aims to maintain or grow its dividend per share annually.
Over five years, the M&G share price has fallen 13%.
But past performance is not necessarily a guide to what will happen next. I am hoping that price fall and a market capitalisation of just £5bn or so for such a large business mean there is scope for a higher valuation in future.
I am concerned about clients pulling more money out of M&G’s main business than they put in. That happened in the first half of last year and if it continues, profits could suffer.
But with a strong brand, large client base, and resilient long-term demand for asset management, I have no plans to sell my M&G stake.
The post How much could a £20k Stocks and Shares ISA earn in the next decade? appeared first on The Motley Fool UK.
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C Ruane has positions in M&g Plc. The Motley Fool UK has recommended M&g Plc. 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.
