Although generating the returns required to have a £1m ISA may seem challenging, doing so in the long run may be more achievable than many investors realise.
Certainly, it will take time to build a seven-figure portfolio, and will require significant regular investments each year over the long run. However, by focusing on growth industries, taking risks where the rewards are appealing and holding stocks for the long term, it may be possible to generate a significant ISA valuation by retirement.
Time in the market
While many investors seek to time the market, in terms of buying low and selling high, doing so can be highly challenging. There are often long periods when investors are missing out on the stock market’s returns as they wait for it to fall. Similarly, they may be unable to consistently and accurately predict exactly when a bull market will start or come to an end.
As such, it may be worthwhile to focus on the amount of time capital is invested in the stock market, rather than trying to time the market. A buy-and-hold strategy may be less exciting than continually buying and selling, but with the impact of compounding factored in, it could equate to significant returns in the long run.
While taking risks when it comes to investing capital may lead to greater losses, it can also equate to higher returns in the long run. As a result, for investors who have a long-term view and who are less risk-averse, it could be a worthwhile move.
For example, over the last two decades, the FTSE 100 has recorded an annualised total return of around 4.5%. The FTSE 250, by contrast, has delivered an annualised total return of around twice that figure in the same period. Although mid-cap shares are generally less diversified and may be less financially sound than their larger peers, over an extended period they may be able to offer a more appealing level of return.
While there are various challenges facing investors at the present time, including Brexit-related risks and fears surrounding the global economy, there are a number of industries that could offer high growth rates. They range from technology to healthcare, and from online retailing to consumer goods companies with exposure to emerging markets.
Buying companies with strong growth outlooks may not allow an investor to buy stocks that are particularly cheap – especially after a decade-long bull market. However, such companies may offer good value for money due to the potential for market-beating earnings growth rates over the coming years that lead to substantial upward re-ratings by investors.
Therefore, while scouring the market for the cheapest shares can lead to high returns in the long run, so too can focusing on the prospects for a variety of industries and buying the highest-quality companies within them. This could boost investors’ returns, and may improve their chances of having a £1m ISA by retirement.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.