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Here’s my plan for creating a £1m ISA

My plan for a £1m ISA isn’t rocket science. Anyone willing to take some calculated risks with their money can also, with time, become an ISA millionaire. 

This is the key. My plan involves not letting inflation erode my savings and not tying up a huge amount of my money in expensive buy-to-let properties. Instead, I strongly believe that investing in shares with a long-term mindset creates ample opportunity for creating a pot worth £1m wrapped up within a tax-efficient ISA.

Punching some numbers into an investment calculator I see that with growth of 7.5% per year (which is achievable), it could take anywhere from 20 to 50 years to build up a million pounds in an ISA, depending on what you start with and how much you put in each year. As an example, putting in £600 a month with £20,000 already tucked away gives a 33-year timeframe. Increase the monthly contribution by just £50 though and it falls to just over 31 years.

It could take longer, and it certainly could take less time than that. One thing it isn’t is a get-rich-quick scheme, but it’s quicker than a Cash ISA as you’d likely never reach the hallowed £1m mark with one of those. 

Compound growth

The phenomenon of compound growth (where dividends create a virtuous circle as you can use them to buy more shares and so receive ever more income from your growing portfolio) is, in my opinion, the single biggest contributor to becoming an ISA millionaire without sleepless nights. Of course, you could invest in penny stocks, Wolf of Wall Street-style. But the risk of losing money – something legendary investor Warren Buffett advises strongly against even if it means forgoing some opportunities for gains – means it isn’t worth it.

Instead, I’d focus on shares that offer a sustainable and growing dividend yield. This will often narrow down the field to the UK’s largest 350 listed companies, known collectively as the FTSE 350. Within these companies, with some research and due diligence, it’s absolutely possible to find companies that fit the bill and work towards a portfolio that will, over time, swell in value.

Some ideas for starters

Legal & General is one company that looks like it meets the criteria, it’s a share that I have actually owned for many years now. It offers an impressive dividend yield and is expanding into new markets, for example, housebuilding. 

I will also take a look at shares that are currently out of favour but are fundamentally stable and could bounce back. These are known as turnaround opportunities and examples include 888 Holdings, Crest Nicholson, Smurfit Kappa, Aviva, SSE and Standard Life Aberdeen. With housebuilders, packaging companies and energy providers out of favour with investors currently, it may actually be a good time to investigate adding these companies into my ISA. I will have to remember though, shares could be cheap for a reason – it may be that they are rubbish. It is important for me to avoid losers and keep backing (and holding) winners. 

The key is to not to be completely risk-averse but to take calculated risks after careful research into those that are doing well but are just temporarily out of fashion. These companies will have the best ‘bounce-backability’, I feel. That is my plan for creating an ISA worth one million pounds.

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Andy Ross owns shares in Legal & General. The Motley Fool UK has no position in any of the shares mentioned. 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.