To many, building a tax-free seven-figure ISA portfolio by investing £1,000 a month sounds like a pipe dream. But the maths say this is more than achievable, even when starting from scratch. Here’s how.
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The maths
Investing £1,000 a month obviously works out at 12 grand a year. Putting that into an account with a 0% rate of return, it would take just under 84 years to reach £1m, according to my calculator.
Barring some extreme medical breakthrough in the field of longevity, most people today haven’t got a spare 84 years to wait. So the main wealth-building fuel is the average rate of return achieved on this £12,000 a year.
This is where some guesswork comes in. The average return over a long period of time on a global index is about 10%, with dividends reinvested. It’s slightly lower in the UK, though the recent performance of the FTSE 100 has been stronger.
But it’s possible to do a lot better or worse than this 8%-10% ballpark figure. If an investor treats the stock market as a get-rich device, loading up on speculative penny shares, then it’s possible to lose a lot of money very quickly (and vice versa).
However, with experience, research, and a sound stock-picking methodology, it’s more than possible to beat the market. An average 10%-15% (or even higher) return is achievable picking individual shares.
Indeed, The Motley Fool was founded to show that it’s possible to beat the market!
But even by investing in indexes and investment trusts, I believe it’s entirely realistic to aim for a 10% return over time. And in this scenario, a £1m portfolio would be built in just over 23 years (with dividends reinvested and excluding platform fees).
Fun fact: letting the 10%-returning portfolio run for 84 years would end in about £376m! This highlights the incredible power of compounding (interest earned upon interest).
Opportunities galore
One stock that I think could beat the market over the next few years is Polar Capital Technology Trust (LSE:PCT). This is a smaller tech-focused trust than its better-known FTSE 100 peer Scottish Mortgage, but it has returned higher numbers.
The share price is up 113% in five years.
Yet I think it can head higher because manager Ben Rogoff has a proven record of picking great tech stocks. These include the usual suspects like Nvidia and Apple, but also savvy picks like Broadcom (up 104% in the past year) and web security firm Cloudflare (+169%).
Right now, he sees incredible opportunities to ride the artificial intelligence (AI) boom over the next decade. And to try to maximise returns, the trust is gradually moving away from the ‘Magnificent Seven’ stocks. It has added companies providing power to AI data centres, for example.
Naturally, there are risks associated with this inherent bias for tech stocks. If this sector sold off heavily — which last happened in 2022 — then the strategy would underperform.
However, over the long term, I’m very bullish on this trust. As Rogoff recently told the The Mail on Sunday: “The investment universe is in a state of flux and there are opportunities galore.”
Currently, the shares are trading at a 10% discount to net asset value, which I think provides a good entry point to consider.
