Despite all the turmoil in the financial markets, the last five years have been pretty rewarding for Stocks and Shares ISA investors.
The most recent data from the official statistics from HM Revenue & Customs show that the market value of investment ISAs has grown significantly since 2020. Some of this comes from new investors leveraging the tax advantages of an ISA. However, a large chunk also stems from impressive capital gains achieved since the pandemic.
So how much money have ISA investors actually made?
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.
Crunching the numbers
Most investors rely on a passive index fund investment strategy. The returns earned since April 2020 obviously depend on which index they choose to track. The FTSE 100 is by far the most popular here in the UK. And while it’s not known for its stellar growth potential, a chunky dividend paired with relatively low volatility still makes it a solid pick for growing wealth in the long run.
Over the last 15 years, the UK’s flagship index has yielded an annualised gain of around 6% a year. But in the last five years, investors who capitalised on the stock market crash at the height of Covid-19 have enjoyed an annualised return closer to 9%. And when compounded over time, a 3% difference can lead to a significant difference in wealth creation.
To demonstrate, £20,000 invested at a 6% annual return for five years would be worth £26,980. But when this return is bolstered to 9%, the value climbs notably higher to £31,315. And if left to run for longer, the gap grows ever wider.
For example, after 10 years, these figures would stand at £36,390 and £49,030 respectively. Or £66,205 and £120,185 after two decades. In other words, an extra 3% can deliver almost twice the wealth generation in the long run.
Pushing returns even higher!
Given the power of an extra 3%, what if investors strive for even higher gains? Even if it just amounts to a slightly bigger 12% annual return, after two decades, a Stocks and Shares ISA could reach £217,850 without putting any more capital into the stock market.
Needless to say, having close to a quarter of a million pounds by investing just £20,000 is an alluring prospect. And it’s a reality that stock picking can potentially provide. Take Diploma (LSE:DPLM) as an example.
Since the lows of the pandemic, the value goods distributor has continued to demonstrate its importance within its customers’ value-chain. That’s translated into a combination of acquisitive and organic growth for revenue and earnings.
Subsequently, the dividend per share has almost doubled from 30p to 59.3p, with share price following suit. And shareholders who bought and held over the last five years were rewarded with a staggering 18.2% annualised gain!
Obviously, no investment is without its risks. Diploma relies on global supply chains to meet its customers’ demands, with a large chunk of sales originating from the US market. However, with a global trade war brewing, the impact of potential tariffs in three months’ time could impede the firm’s ability to keep delivering double-digit gains.
Nevertheless, the long-term potential of this enterprise remains promising. So for investors looking at a stock-picking strategy for their ISA, Diploma could be worth a closer look.
