Is it possible to turn a simple Stocks and Shares ISA into a long-term wealth creation machine?
I believe it is. In fact, if I had £20k and put it into an ISA now, I reckon I could realistically aim to turn it into a portfolio valued at a quarter of a million of pounds over the course of time.
Here is how.
Getting started on the right foot
To begin, it is useful to set out some basic principles.
I would take a long-term approach. As a serious investor, I believe it is possible to increase my ISA value over 12 times — but not in a short time period.
Of course, I would be happy to have one share that did brilliantly. But even the best business can run into unforeseen difficulties (or issues unforeseen by me, at least). So I would diversify across five to 10 different shares. I see £20K as ample for that purpose.
Fees and commissions could eat into my returns, so I would take time upfront (now, in fact) to choose the right Stocks and Shares ISA for my own financial circumstances and investment objectives.
Milestone towards a million
Even so, how could I hope to turn £20,000 into a serious milestone on the road to millionaire status later on?
It is not actually as hard as it may at first seem, nor as improbable.
If I compound the value of my Stocks and Shares ISA at 12% annually on average, I will have hit my goal after 23 years.
That compounding does not just rely on dividends. It can also come from capital growth. Of course, conversely, declining share prices could work against me and that’s always a risk if I pick my stocks poorly.
Buying brilliant shares at attractive prices
So, what sort of shares would I look for that I think could potentially earn me a 12% compound annual return over the long term?
A good example of the sort of firm is Judges Scientific (LSE: JDG).
Its share price has grown 94% over the past five years and the dividend has been growing annually in double-digit percentage terms recently, albeit the yield is meagre.
Judges has identified a lucrative market. It sells scientific instruments to clients like labs and industrial users. They need absolute precision so are willing to pay a premium for quality products.
Through buying up competitively priced small and medium-sized manufacturers, Judges has been able to build a lucrative product portfolio of scientific instruments with high profit margins.
Its unique knowhow and customer base give it a strong competitive advantage, helping its profits and dividends. In fact, the model has been so successful that a key risk I see is rivals trying to copy it, perhaps pushing up the purchase price for potential acquisitions when they come on the market. That could hurt Judges’ strategy.
But the reason I am not buying it now is not that risk. It is a valuation that I think is too high (even after a 30% share price fall since May).
If I could buy it at the right price, I would add Judges to my Stocks and Shares ISA in a heartbeat.
