Every year, the deadline for contributions to an ISA comes around. Every year, some people put money into their ISAs while others miss the opportunity. Life moves forward. But what if I used my £20k ISA allowance before the deadline at midnight tonight, even if I had no immediate plans as to how to invest the money?
I think by doing that I could end up being a millionaire 30 years from now. Here’s how.
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.
Money now, ideas later
The annual deadline is for contributions. I could wait until I decide how to invest the money before putting any in, but by then, this tax year’s ISA contribution deadline could have passed forever.
So even if I did not yet know how I planned to invest it, I would choose the Stocks and Shares ISA that suited my own financial circumstances best and then put my £20k into it before that midnight deadline.
Once that was done, I could decide at my own leisure how best to invest it.
Having a target
But how could I hope to turn a £20k contribution today into a million-pound nest egg 30 years from now?
The answer – or at least one answer – lies in building success upon success. By ploughing returns into building up a bigger nest egg, there is a bigger base for future returns.
In investment terms, this is known as compounding – and it can be a very powerful force multiplier.
As an example, imagine I could compound my £20,000 at an annual rate of 13.2%. After 30 years, one year’s ISA allowance today would have turned into a share portfolio worth north of a million pounds!
Getting the gain
But is 13.2% achievable? No FTSE 100 shares offer that yield. Some others do but can be risky. Diversified Energy currently yields 28%, but last month announced its dividend would be cut by two thirds.
The thing is though, compound annual return does not have to come from dividends alone (or at all). Share price growth (or decline) is also a factor.
A 13.8% annual gain is difficult, but I think it is achievable. Using my £20k ISA allowance, I could spread my money equally over five to 10 different shares. That would give me the benefit of diversification. But I would still need to choose some real winners!
The Warren Buffett way
Over much longer — the 58 years up to 2023, specifically – the per-share market value of Warren Buffett’s Berkshire Hathaway compounded at 19.8% annually.
Buffett achieved that by investing in companies like Coca-Cola (NYSE: KO).
Why? Think about the attributes of the soft drinks maker. It has a large addressable market likely to endure. It can profit from that, thanks to strong competitive advantages such as its unique assets including iconic brands and proprietary formulas.
But Buffett has not bought new Coke shares since the 1990s. The business faces risks such as rising health concerns leading to shifting customer tastes. When Buffett bought he pounced on what he saw as an attractive valuation, and has held for the long term.
If I can find great businesses selling at attractive valuations, I believe a long-term approach could help me transform this year’s ISA allowance into a million pound portfolio!
