Drip-feeding money into an ISA over time can be an easy way to try and build up a long-term nest egg tax-free. But just how big might such a nest egg end up being?
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The answer depends on a few factors: how much you put in, for how long and by how much it grows (or not).
Doing the maths
For example, imagine someone puts £150 per week into their ISA for 35 years.
How big that grows to be will depend on their compound annual growth rate, or CAGR. At a CAGR of 5%, it would hit over £720k.
At 10%, that number would be £2.2m. At a 15% CAGR, after 35 years the ISA ought to be worth £7.3m. Yes, £7.3m!
Tough, but doable
A CAGR includes capital gains but also dividends. However, capital losses (from selling shares for less than you bought them) would eat into it. And dividends are never guaranteed.
Another point some people overlook is the negative long-term impact of dealing fees and account costs, so it pays to hunt around for the best Stocks and Shares ISA.
Is a 15% CAGR achievable – or even 10% or 5%?
All three are achievable, but even 5% can be harder than it looks, as over the long term (like 35 years) there will be bad as well as good years in the market. Some very careful selection of shares would be required.
I also think 15% is feasible, but it is above what most investors would achieve in their ISA over the long run. Taking steps to be a good investor might help improve performance.
Looking for brilliant shares
Success stories can give us some clues.
One UK share that has left that 15% CAGR goal in the dust is Filtronic (LSE: FTC). It is up 2,406% in just five years.
It is easy to point to one key reason for that: Filtronic has won some huge contracts with SpaceX, which is a shareholder.
That means there is a concentration risk. If anything happens to sour that relationship, or SpaceX’s needs change, Filtronic’s revenues could plummet.
But there is a bigger question to be asked: why has SpaceX been happy to buy lots of specialist solid-state power amplifiers from a fairly small business based in the north of England?
It is not charity. Filtronic has identified that the space market is set to grow and needs some very specialist components, that only a limited number of companies worldwide have the necessary expertise or ability to make. SpaceX came knocking as a result of Filtronic’s strategic choices.
It has been investing in growing its capabilities, ready to ride any upturn in demand not only from SpaceX and other space companies, but also other clients like aerospace manufacturers.
It has entered the second half of its current financial year with a record order book and also points to “increasing customer diversification”. That might help reduce the concentration risk I mentioned above.
The Filtronic share price has soared because it has a compelling value proposition in a growing market. I see it as a share worth considering.
