If I put £20k in a Stocks and Shares ISA today, how much might I have in 5 years?

This writer considers the sort of returns he might be able to generate after half a decade of investing inside a Stocks and Shares ISA.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Long-term vs short-term investing concept on a staircase

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing for the long term in a Stocks and Shares ISA is one of the best ways to build wealth in the UK.

Most ISAs offer a choice of thousands of different stocks, investment trusts and exchange-traded funds (ETFs). The real wealth-building benefit, though, is that all gains I make are totally tax-free within the annual £20k allowance.

Here, I’ll consider how much money I could make after five years if I invest £20k in one of these accounts.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Going on averages

Now, the first thing to point out is that precise stock market returns are ultimately unknowable. But what we do know is that markets have trended upwards over time.

In fact, a century of stock market data from the US and UK tells us that the annualised total return (both share price gains and dividends) is between 7% and 10%.

That said, the iShares world index fund below shows us that global stocks have returned about 74.5% over the past five years.

If they did so again, which is far from guaranteed, I’d have £34,900.

This assumes I don’t take out my dividends and spend them. Ideally, I’d want to reinvest them back into buying more shares. This way, I’d really start to harness the incredible power of compounding.

Active investing

As mentioned, the above figures are averages. It’s what I might hope to achieve investing passively.

But could I beat the market average by actively investing in individual stocks and funds? Well, this is harder to do and would obviously depend on what I buy.

In the UK, two perennially popular investments are Fundsmith Equity (managed by Terry Smith) and Warren Buffett’s Berkshire Hathaway.

According to my calculations, a £20k investment split evenly between these five years ago would now be worth around £38,700. So, a handy bit of outperformance relative to the global index.

Of course, I could be accused of cherry-picking here. But they’re hardly obscure picks. They’ve both been fantastic long-term compounders, beloved by many.

Investing in excellence

I try to find excellence, buy excellence, and add to excellence over time. I sell mediocrity. That’s how I invest.

David Gardner, co-founder of The Motley Fool

Finally, we should remember that an individual five-year period can be very different from another.

Take the last five years, for example. We had the first global pandemic in a century, followed by the largest military attack on a European country (Russia on Ukraine) since World War II. Then surging inflation was met with the fastest interest rate hikes in modern history.

Stock markets don’t like uncertainty, as the saying goes. And the last five years have contained enough unpredictability and tragedy to fill a few decades.

But the crucial point is that great companies survive periods of turbulence. Not only that, they often get stronger as weaker competition falls by the wayside and investors rush to put their money behind them.

Wrapping up

So how much could I make in five years? Well, the average suggests 7%-10% per year. But nothing is certain and it may be less (or more).

But if I were to find individual stocks that massively outperform — similar to Frasers Group (up 291% in five years) or Ferrari (up 276%) — then it would be significantly more.

The Foolish takeaway is that picking stocks in an ISA can potentially deliver huge returns for everyday investors like myself.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Ferrari. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

My favourite FTSE 100 passive income stock that keeps the Christmas coffers full

The holiday season is expensive and can leave many consumers struggling to make ends meet. Here’s how I use a…

Read more »

Investing Articles

The latest growth forecasts suggest the Glencore share price will hit 555p!

Harvey Jones has been disappointed by the performance of the Glencore share price since he bought the commodity stock last…

Read more »

Dividend Shares

A closer look at the 11% dividend yield forecast for Phoenix Group shares

Phoenix Group shares have one of the highest dividend yields in the FTSE 100 index today. Could this be a…

Read more »

Investing Articles

If I’d put £25,000 into the FTSE 350 at the start of 2024, here’s how much I’d have today!

Many FTSE shares have rebounded this year as interest rates look set to keep heading lower and market appetite for…

Read more »

Investing Articles

Up 40%, but experts forecast the easyJet share price could soon hit 664p! Time to buy?

The easyJet share price has been flying lately and stock analysts are predicting more fun to come. But there's only…

Read more »

Storytelling image of a multiethnic senior couple in love - Elderly married couple dating outdoors, love emotions and feelings
Investing Articles

Worried about tax raids? Here’s how I’m targeting a £44,526 passive income with shares

Investing in a Self-Invested Personal Pension (SIPP) or Individual Savings Account (ISA) can supercharge one's passive income, says Royston Wild.

Read more »

Young black man looking at phone while on the London Overground
Investing Articles

A FTSE 250 share I’d buy and aim to hold for 20 years!

This FTSE 250 share has soared more than 2,000% during the past decade. Our writer Royston Wild thinks it has…

Read more »

Bournemouth at night with a fireworks display from the pier
Investing Articles

3 heavily discounted UK shares to consider buying in November

These three UK shares have been dragged down and our writer believes they're trading below their true value as we…

Read more »