Making a million via a Stocks and Shares ISA continues to be a realistic prospect for many investors. Certainly, the near-term outlook for the stock market may be challenging due to economic difficulties. However, the long-term performance of the FTSE 350 is likely to include strong growth judging by its track record.
Therefore, now could be the right time to start buying a diverse range of good value shares. Holding them for the long run could produce an ISA valued in excess of £1m.
Investing money in good value shares
It may be tempting for Stocks and Shares ISA investors to buy the cheapest or the fastest-growing shares. But obtaining a mix of these two qualities could be a sound means of generating high returns.
Cheap shares with lacklustre financial prospects over the long run are unlikely to command higher valuations. Similarly, stocks with high earnings growth prospects that trade on excessively high valuations are also unlikely to offer scope for capital growth.
As such, identifying companies with attractive long-term futures while they trade at fair prices could be a better idea. They may offer a more realistic opportunity to build a large nest egg versus cheap shares or growth shares that lack a margin of safety.
Such a strategy has generally been profitable in the past. For example, investors such as Warren Buffett have used value investing to great effect to obtain higher returns than the wider stock market.
Building a diverse Stocks and Shares ISA
Some Stocks and Shares ISA investors may simply purchase a handful of companies. They may determine that their best ideas are the only ones worth holding. However, this means they’re exposed to a significant amount of company-specific risk. This is where an individual business experiences a share price fall that has a large impact on a portfolio’s performance. This is because it represents a large proportion of its total holdings.
Therefore, it’s important to diversify among a range of companies that operate in different regions and sectors. This can reduce the risk of loss. It will also improve returns through allowing an investor to capitalise on a broader range of opportunities.
Making a million
Even if a Stocks and Shares ISA’s performance matches that of the stock market, it can become worth in excess of a million over the long run. For example, a £750 monthly investment that matches the FTSE 250’s 8% annual total returns over the past 20 years would be worth £1m in under 30 years.
However, it’s possible to obtain a higher return than the stock market through building a portfolio of undervalued shares. Over time, they could produce high capital returns that reduce the period it takes to obtain an ISA valued in excess of £1m.
