Is it possible to become a Stocks and Shares ISA millionaire? Yes it is. Several thousand people have ISAs worth over a million pounds.
There are different ways to try and achieve such a goal. Understanding them can be helpful when thinking about how to invest your own Stocks and Shares ISA, even if you do not plan to aim for a million.
Invest for the long term
If someone wants to become a Stocks and Shares ISA millionaire, what is a realistic timeframe? For some investors, it might be 40 years. Others could manage it in 30 or 20 years. Some might even be fortunate with particularly good investments or timing and manage to have a million pound ISA in a decade.
But it is not going to happen overnight – or in just a year or two. Starting from zero and building an ISA to a valuation of a million pounds is a long-term project, pure and simple.
Capital is speed
The more one puts into an ISA, the more capital will be available to invest. Whatever the investment strategy, putting more money to work ought to magnify the impact of any positive investment results.
That is true for capital gains. But it also applies to dividends. If I invest £2,000 in 8%-yielding shares, I ought to earn £160 in dividends annually. Spending £10,000 on the same shares would earn me five times as much dividend income.
Everyone’s financial situation is personal and many investors are unable to put £20,000 into a Stocks and Shares ISA year after year. In my example though, I presume that starting with zero today, an investor puts that much in each year.
Compound annual gain
Alongside the amount invested (and the fees or costs of a specific Stocks and Shares ISA), the other factor that will determine how quickly an ISA could grow to a certain size is the compound annual gain. That gain could come from share price growth, dividends, or a mixture of both.
As it is compounded over the lifetime of the investment, it could also reflect some good years and other bad years.
For illustration, imagine that my example ISA compounds at 12% annually.
That is an ambitious target as it is above long-term FTSE 100 share price growth and also average dividend yield (although not far off the current yield of some FTSE 100 shares like Vodafone). But I do think it is possible with careful share selection.
Doing that, while investing a steady £20,000 annually, I would be a Stocks and Shares ISA millionaire by 2040!
Smart investment principles
The theory sounds easy – but that does not mean the practice would be!
However, I think the example illustrates two key points for everyone investing in a Stocks and Shares ISA. First, the amount you can hope to earn is related to how much money you put in. Second, what you earn from shares either due to price growth or dividend income (and after allowing for costs as well as losses on some shares) is critical to long-term performance.
Finding brilliant shares at the right price could be a very lucrative move. That is exactly what I am looking for in today’s stock market.
