Stocks and Shares ISA success doesn’t come for free. But it might be a lot cheaper than you think.
Whether you started at 20, just got going at 30, or still haven’t made your first purchase at 40, it doesn’t really matter.
The only things you need are regular commitment and time.
Why? Well, over the course of 35 years, from 1984 to 2019, the FTSE 100 returned an average 7.75% per year.
Take your time
Promises of immediate riches at zero risk are confined to scams designed to cheat you out of your money. You will have to take some risk: you do have to invest money to make money.
But if you invest over a long enough time frame, you can certainly reduce your risk and keep more of your money.
Investing the same amount in a Stocks and Shares ISA every month does two things.
Firstly, it allows you to ‘pound-cost average’. This means you take advantage of cheaper prices when the market is down and smooths out your returns over time. It also makes sure you don’t just buy in a lump sum when the stock market could be well overvalued.
Secondly, it builds up compound gains. The longer you can keep investing, the more compound interest works in your favour.
For example, say you start with a healthy £10,000 lump sum. Buy a single FTSE 100 tracker and let it sit in your Stocks and Shares ISA. If you add nothing to this £10,000 over 35 years, you end up with £136,664, at the average 7.75% a year return.
But add £500 a month and that £136,664 suddenly turns into £1,154,996! Compound interest becomes exponentially more powerful the more we can add to our original stake over time.
Sticking with a lump sum is like powering an engine with coal. But adding extra money every month is like injecting it with rocket fuel!
Each scrap of cash you can put together in a Stocks and Shares ISA should be working to make you richer.
And history has shown us that investors make their most money over time from reinvesting dividends. Without this key fact, you lose the ability to take advantage of compounding.
At first, the impact from reinvesting dividends is quite small. Not much will happen for the first 10 to 15 years: a long time to see no huge growth! But after 15 years, your wealth really starts to motor.
Think of an exponential curve. It starts small, and increases slowly. Then suddenly it starts to increase rapidly, and shoots ever higher each year after that.
The additional impact every year from ever greater numbers starts to hit a critical mass at about year 18. If you can be patient and hold on, this is where you’ll make your £1m.
Stocks and Shares ISA success
The best thing about a Stocks and Shares ISA is that all your gains are tax-free. You don’t have to give the government a slice of your earnings from share price rises or dividends, and it will never cost you anything to take money out.
Following the simple principle of adding £500 a month and staying consistent over time. That’s how I plan to make £1m in my Stocks and Shares ISA, and I think you can too.
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.