As the summer holidays draw to a close, many people will return to their daily lives reinvigorated and ambitious about the coming year. Stepping aside from short-term goals, what about longer term financial plans? For example, if I started now, could I build my Stocks and Shares ISA into a million pound retirement pot over the next couple of decades?
I believe I could. It is not guaranteed, of course. But here is how I would go about it.
Long-term wealth creation tool
First things first. Let me explain the role of my Stocks and Shares ISA here. The ISA could help me build a retirement fund in a tax-effective way.
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.
I would be able to invest £20K each year in my ISA. That is a sizeable sum, but if I want to aim for a million I need to be willing to save and invest at a meaningful level.
My first move would be to decide which Stocks and Shares ISA seemed best-suited to my own needs. There are lots of different options to choose from.
Getting more back than I put in
Still, even if I put in my full £20K allowance annually for 20 years, that would give me £400K – far short of my target valuation.
I would hope to close the gap by putting the money in my ISA to work in the stock market. If I could growth my ISA value by a compound annual rate of 8.8%, my account would have a million pound valuation after 20 years.
How to aim for long-term growth
That might not sound like a challenging target. But remember, I am investing for the long term, through both good years and bad.
Still, I think it is achievable. It could be possible to hit that target through growth shares, income shares or a combination of both.
What matters in my view is that I buy into outstanding businesses that I think can produce outsized returns over time, thanks to strong commercial prospects and an attractive share price when I invest.
One share I hold
As an example, consider one of the shares I own in my ISA: investment trust Income and Growth (LSE: IGV).
Over the past five years, the share has fallen 10%. That may not sound like the stuff of investor dreams! But during that period, it has paid out 49.5p per share in dividends, which is around 70% of the present share price.
By investing in small and medium-sized companies and holding the shares while they (hopefully) grow, Income and Growth has been able to generate sizeable cash flows that have allowed it to pay juicy dividends. It targets at least 6p per year in dividends, around 8.5% of the current share price, but often pays more.
No company’s dividends are ever guaranteed and there is a risk that Income and Growth’s investments underperform, hurting cash flow.
But its proven management team and simple, lucrative strategy mean the share, currently yielding 15%, share has earned a place in my ISA.
