Many investors dream of being able to make £1m in the stock market. Unfortunately, for too many, this dream does not become a reality. However, by making the most of a Stocks and Shares ISA and setting up a regular investment plan, you could dramatically increase your chances of being able to hit this lofty target.
Stocks and Shares ISA
The most significant benefit of using a Stocks and Shares ISA to grow your financial nest egg is its tax advantages. These products are like investment shopping baskets. You can buy a selection of investments inside the wrapper, and they’re then sheltered from UK income tax and capital gains tax.
However, Stocks and Shares ISA contributions are limited to £20,000 a year. But this may be enough to help you achieve your financial goals.
You see, by making the most of compound interest, it’s possible to grow a small monthly Stocks and Shares ISA contribution into a sizable sum over the long term.
The best path to take on this journey is to use a low-cost tracker fund. One of the biggest mistakes investors can make when saving for the future is to buy stocks and shares they don’t understand. This can result in losses, which may prevent you from hitting your wealth goals.
But a low-cost tracker fund tracks a market index such as the FTSE 100 or FTSE 250.
Over the past three-and-a-half decades, these indexes have returned 8% per annum and 12% per annum respectively. That’s significantly more than cash over the same time frame.
And at these rates of return, it may be possible to turn a monthly deposit of £500 in a Stocks and Shares ISA into a life-changing sum.
The road to a million
A return of 12% per annum might not make you a millionaire overnight, but over the long term, these consistent returns really add up.
For example, according to my calculations, it would take just 26 years to turn £500 a month into a million at a 12% per annum rate of return. At a return of 8% per annum, it would take 34 years of saving £500.
These figures show how straightforward it is to make £1m with monthly Stocks and Shares ISA contributions. The critical part is to keep the contributions going. Consistency is key here. The market will do all of the hard work for you if you can make sure the ISA is being topped up every month.
If you’d like to pick stocks yourself, you might be able to achieve a higher return. However, this approach also comes with more risk. One mistake could be a significant setback on your journey to a million. Therefore, it may be best to build a well-diversified portfolio of stocks as well as funds. This may allow you to profit from any upside growth while limiting downside risk.
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Rupert Hargreaves has no position in any of the shares mentioned. 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.