Investing money within a Stocks and Shares ISA has been a route to generating steady gains for many people.
With £1,000, I’d be keen to put the money to work in an ISA now as part of a long-term programme of investment.
Hundreds of ISA millionaires
Platform provider Interactive Investor reported that it had 852 ISA millionaires using its service in January 2023. And that figure demonstrates the potential the stock market has to compound gains and build up an investor’s capital.
However, investing in stocks and funds via an ISA is best viewed as a long-term plan and not as a get-rich-quick activity.
The average age of Interactive Investor’s ISA millionaires was 73. And part of the reason for that is the ISA allowance. It limits how much we can put into an ISA each year while retaining the tax-free benefits. In the 2023/24 tax year, the ISA allowance is £20,000.
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.
Most of those millionaires have been putting funds into ISAs for many years. And before that, they were likely using Personal Equity Plans (PEPs), which were around before ISAs.
It looks like many of the millionaires on Interactive Investor’s books are ordinary private individuals who have compounded modest annual gains for a long time. So we’re not talking about hot-shot stock pickers or traders sweating over their computer screens for hours on end.
Instead, these private investors have likely been getting on with their lives and investing sensibly along the way.
Playing the long investing game
The route to success for most of them has likely been:
- Adding regular money to invest.
- Compounding modest gains.
- Keeping doing it year after year for a long time.
Investing need not be complicated. Well-known billionaire Warren Buffett regularly points out the compounded annual gain of America’s S&P 500 index. And in his 2022 Berkshire Hathaway shareholder’s letter, he quoted the figure as 9.9% with dividends reinvested.
What does that even mean? After all, an average figure for returns of just under 10% a year doesn’t sound like much. And that might be so, but add time to the equation and the magic of compounding starts to happen.
For example, if I invested £1,000 and compounded returns at 9.9% for 20 years, I’d end up with just over £6,600.
That’s a long-term return worth having. And the basic principle of building gains upon gains each year — or compounding — is probably the engine driving the outcomes for Interactive Investor’s ISA millionaires.
Past performance of the stock market is no guarantee of future returns. However, my own portfolio has investments in several passive index tracker funds. For example, I’m following the S&P 500, the FTSE 100 and the FTSE 250 indices.
So, if £1,000 was my first ISA investment, I’d likely split the money between a few tracker funds similar to those.
But ISA millionaire status would require follow-on investments. I’d put regular money into my Stocks and Shares ISA. Then I’d diversify by investing in some select investment trusts and individual company shares too.
Compounding works best when started early and continued for as long as possible. I’d begin right away.
