Not everyone can win a million on a game show. It’s just not possible for most. But becoming a Stocks and Shares ISA millionaire is much easier and more likely.
What’s the catch? Well, it not likely to be possible to do it by tomorrow, next year, or even in five years. You need patience and to be able to invest for the long term.
If you have a long enough time frame to invest, you might be surprised how little you need to regularly invest to achieve the goal of becoming a Stocks and Shares ISA millionaire.
If you have 35 years until you plan to retire, you could reach this goal starting with just an initial £10,000 plus a regular investment of £200 per month. That’s just £2,400 per year.
The average stock market return over the long term is said to be 10% per year. Over a long investing period of 35 years, it’s reasonable to assume that an average annual return of 10% is likely. Of course with the stock market there are no guarantees, but to me, it seems a safe assumption on the basis of probabilities.
What if you have 25 years until you want to retire? To reach £1m in your Stocks and Shares ISA, you would need to start with £10,000 plus a regular monthly investment of £670. Alternatively, if you started with £30,000, you could do the same with a regular monthly investment of £485.
As you can see, the earlier you start investing, the less you need to invest every month. This is due to the beauty of compounding. Einstein famously once said, “compound interest is the eighth wonder of the world”. I’m not surprised. It really is magical.
What I’d invest my Stocks and Shares ISA in
If I were to create a simple automated strategy to retire with £1m, I would set up a Stocks and Shares ISA with my initial £10,000 investment. I would then add a regular investment plan that drip feeds £200 per month into a fund that tracks the S&P 500 index.
Investing in a stock index tracker like this is one idea. Another option is to select a managed fund or investment trust. I like the Fundsmith Equity Fund, managed by veteran fund manager Terry Smith. It holds a concentrated portfolio of 20 to 30 global companies, and focuses on high-quality businesses that are difficult to replicate.
Increasing investment returns
Is it possible to become a Stocks and Shares ISA millionaire a bit quicker without increasing your investment amount? Yes, it’s possible. To do so, you would need to increase your investment return.
By taking a more active approach to investing, I believe it’s possible to achieve a return greater than 10%. Achieving 12% to 15% could be realistically possible, in my opinion. To do so you may need to research some other good investment ideas.
At a 15% annual return, starting with £10,000 and investing £200 per month, you could retire a Stocks and Shares ISA millionaire in 25 years. So increasing your annual return from 10% to 15% reduces your target time from 35 years down to 25 years, highlighting again the beauty of compounding.
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Harshil Patel owns units in Fundsmith Equity Fund. Views expressed 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.