A £1m Stocks and Shares ISA might sound like an unlikely dream for most. But looking at the numbers, it could be within reach providing a few assumptions are met.
Let’s consider what it actually takes to reach this milestone. First, the long-term average stock market return is said to be around 10% a year including dividends.
In most years it’s nowhere near this figure. It’s often far higher or far lower. But as it’s an average over a long period, it’s a reasonable assumption to make.
Taking the long view
Next, I should consider how long this plan could take. Reaching the lofty sum of £1m will likely take more than just a few years.
That’s why investors should consider a Stocks and Shares ISA as a long-term investment vehicle and start as early as possible.
My calculations show that by adding £507 a month to my ISA, I should reach £1m in around 30 years. Let’s think about that. It might sound like a very long time, but a million is also a lot of money.
With that, I could earn between £40,000 and £70,000 a year in dividends alone if I owned a selection of the best dividend shares.
And that could fund or supplement my retirement.
Growing a S&S ISA
Now we’ve looked at the roadmap to become a Stocks and Shares ISA millionaire, let’s consider a few details.
First, what should I invest in? As my timeframe spans several decades, I can afford to take a little more risk. But that certainly doesn’t mean I should put all my money in penny stocks.
Instead, I’d buy shares in companies that have the potential to grow significantly over time. These businesses should be profitable, generate plenty of cashflow, and have solid balance sheets.
Much like Warren Buffett, I’d focus on a strong competitive advantage or what he calls a moat. This could be a unique technology or globally recognisable brand.
I’d also spread my risk and choose from a wide selection of industries and countries. This would avoid putting all my eggs in one basket.
Top of the picks
I’d say many FTSE 100 shares meet these criteria. So I could set up a monthly investment plan with my broker to invest in a Footsie tracker fund. Every month, I’d be buying shares in a fund that aims to track this large-cap index.
Brokers often enable this to be done with minimal transaction costs. And if I had a spare £507 a month for this plan, I’d allocate half towards this option.
In addition, I’d pick and choose a few select shares that I feel will turn out to be the biggest winners over time. To prevent excessive transaction costs, I’d stagger purchases into my favourite stocks.
With spare cash, some quality shares that I’d like to add to my Stocks and Shares ISA include Rio Tinto, RELX, and Games Workshop.
A word of warning, though. My individual shares could be more volatile than a tracker fund. That’s why owning a variety of shares and drip-feeding a fixed amount every month could be the solution for a smoother ride.
By doing so, I’d also avoid trying to time the market. As the investment saying goes, “time in the market beats timing the market”.
