There are thought to be around 2,000 Stocks and Shares ISAs with a seven-figure balance in the UK today. I find that figure impressive.
But how long would it take me to become part of that cohort?
Well, an investor starting from scratch today could expect to reach that magical milestone in 21 years if they consistently maxed out their £20,000 yearly allowance.
That’s assuming they mirrored the returns of the FTSE 100, which has provided an annualised total return of around 8% since inception in 1984. Total return are capital gains from share price appreciation as well as income from dividends.
But what if I only have £10 a day to invest rather than £20,000 a year? How long would it take me to become an ISA millionaire then? Let’s find out.
Crunching the numbers
An exercise like this requires working with averages. So, let’s assume I start with £6,757. That’s the average amount that a British adult had saved in 2020, according to data from the Office of National Statistics.
Now, let’s add my £10 a day into the stock market, which equates to £3,650 a year. Earning a market-average annualised return of 8% a year, it would take me 38 years to become an ISA millionaire.
Obviously, a million pounds in 38 years won’t buy me what it can today (due to inflation). But it does demonstrate the power of compounding.
I should point out that the historical returns of these indexes don’t guarantee future returns. They could be less, and will never be predictable one year to the next.
Moreover, investing £10 a day wouldn’t be realistic if my investment platform charges me trading fees. But I could instead invest my accumulated funds every quarter or semi-annually. That way I could justify the transactional costs associated with buying shares.
Personally, I invest monthly with whatever spare cash I have.
Extra percentage points?
From 1965 to 2022, Berkshire Hathaway shares generated a compound annual return of 19.8% a year. That’s exactly double the 9.9% return (including reinvested dividends) of the S&P 500.
I think it’s safe to assume that I won’t be beating those returns. After all, Warren Buffett is one of the greatest investors of all time.
But the good news is I don’t have to match those types of returns to reach my target. As even the Oracle of Omaha himself has acknowledged:
Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.
Warren Buffett
Looking at the S&P 500’s annualised return, I can see that it’s slightly higher than the FTSE 100 average.
Therefore, investing in both indexes could give me a chance to capture this extra upside. This could boost my average annualised return to 9%.
An extra 1% a year may not sound much, but it’d actually shave three years off the time it would otherwise take to reach a million pounds.
Finally, I could also invest in individual stocks. While more risky and time-consuming, they have the potential to outperform the wider market, if I chose the right investments.
