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We’ll all be millionaires one day. Whether it’s in 100 years’ time or 500, the persistent inflation means £1m will (eventually) end up being the cost of a packet of crisps, a pint of milk, or a brand new hoverboard. Consider that only 200 years ago, Jane Austen described Mr Darcy as one of the wealthiest gentlemen in Regency England with an income of £10,000 a year! But with the help of a modern investing vehicle, the Stocks and Shares ISA, £1m pounds might be within reach in decades rather than centuries.
Even those on non-superstar wages can use the multiplying effect (and tax benefits!) of ISAs to hit the seven-figure mark with run-of-the-mill saving and investing. Here’s how.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Hands-off investing
Those getting started may wish to buy index funds or investment funds such as FTSE 100 fund Pershing Square Management (LSE: PSH). I highlight billionaire Bill Ackman’s fund here because it is a stock I own myself. It also exemplifies some of the qualities newbie investors might prize.
For one, it’s hands off. The decisions on what to buy and when to sell are passed to Bill Ackman and his team. For two, it offers diversification. The fund holds 15 stocks, which as a group will be a lot less volatile than a single stock. The third and most important piece of the puzzle is that it might give an edge on average market returns.
Stocks like Uber, Nike, and Amazon make up a big chunk of the portfolio. If car rides, shoes, and online shopping have a good few years, then I might too. As long as Ackman and Co choose stocks shrewdly, then I hope to achieve an 11% or 12% return as a yearly average.
A downside of a specialised fund is that there is a chance it will underperform the average too. This is in contrast to an index fund that tracks the whole market, which will perform like the market.
Nuts and bolts
So, where does this million pounds come from?
The wealth creation in this process is very simple really. Savings go into the ISA; compound interest does the rest.
Let’s say we’re calculating over a typical 30-year investing timeline. If our ISA returns an 11% average a year, then investing £400 a month will take us to the million mark. If the stocks in this account manage 12% instead, then £328 is the needed monthly savings rate.
This isn’t an action plan to be followed to the letter. The nuts and bolts of investing over such long periods mean that these calculations are just to show what’s possible. And the next three decades will almost certainly bring recessions, economic crashes, black swan events, plagues, and other shocks to the system that might endanger the whole plan altogether. Still, for a British saver looking to make the best use of their money, I think this is a great option to consider.
