A Stocks and Shares ISA is a great tool for building wealth. And according to the latest data, there are over 5,000 individuals with more than £1,000,000 in an Individual Savings Account.
Contribution limits mean it takes time to get to that level. But the stock market is a good way for investors to try and put themselves in the fast lane for the journey there.
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Contribution limits
The maximum anyone can put into an ISA in any financial year is £20,000. That means getting to a million within 10 years probably isn’t realistic for someone starting from scratch.
Over the longer term, the average annual return from FTSE 100 has been close to 8.5%. At that level, you’d need to be starting from around £318,380 to get to £1,000,000 by 2036.
There’s no way to put that amount into a Stocks and Shares ISA in one go. And that highlights an important point about investing to build wealth, which is that it takes time.
That’s why one of the best things someone can do to get an advantage is to start early. If it takes 10 years to get to a million from £318,380, the next question is how to get to that level.
The road to £318,380
Starting from scratch, investing £20,000 a year at 8.5% gets an investor to £318,380 within a decade. And that demonstrates the power of compound interest over time.
Based on those assumptions, it takes the same amount of time to get from £0 to £318,380 as it does to get from £318,380 to a million. That’s something it’s important for investors to remember.
The returns start slowly at first and it can feel like things aren’t going anywhere. But for investors who keep going, the rate at which the returns get bigger increases pretty rapidly.
This means it’s at least possible for someone starting from scratch to reach £1,000,000 in an ISA within 20 years. But it depends on finding investments that can generate that 8.5% annual return.
Growth potential
One stock I’ve been buying recently for my own portfolio is QXO (NYSE:QXO). It’s a US building materials supplier that I have very high hopes for over the next 10 years.
The company currently makes $4.5bn in annual revenues, but it intends to grow this to $50bn by 2035. Its plan for getting there is via a series of acquisitions in the highly fragmented industry.
This sounds nice, but the reason for thinking it’s plausible is that Brad Jacobs – the firm’s CEO – has an outstanding record of doing this in other industries. And that’s why I’ve been buying the stock.
If, for whatever reason, Jacobs doesn’t see the project through to completion, I suspect things won’t go so well for me. But a market value of $16bn should mean a lot to gain if things go to plan.
Risks and rewards
Being a good investor isn’t about eliminating risks – that’s just not possible in the stock market. It’s about being aware of what they are and finding ways to manage them intelligently.
A good way of doing this is by building a diversified portfolio. And as part of this, I think investors aiming for a million might consider whether there’s a place for QXO in their Stocks and Shares ISAs.
