Growing a Stocks and Shares ISA from nothing to £1m is arguably similar to planting an oak tree.
When you first put a small acorn in the ground, it hardly looks capable of becoming something remarkable. Sprouting takes many months, and then it takes years to even become a sapling. For a long time, it impresses nobody.
Building wealth through investing is similar for most people. In the early years, portfolio gains are modest, even if you’re regularly adding money. A £550 return here, a £43 dividend there. Reaching £50k can take a lot of patience and discipline.
But over time, something miraculous starts to happen underneath. Just like an oak tree develops a powerful root system underground, a portfolio can eventually start compounding. In other words, returns begin generating their own returns!
But how long could it realistically take to become an ISA millionaire?
Running the numbers
The annual ISA allowance is currently £20,000, and the long-term average return from a global index tracker is around 9% (with dividends reinvested).
Putting these things together then, it would take roughly 19 years to hit the £1m mark, starting from scratch.
But hang on. Not everyone can afford to invest £20k a year (the equivalent of £1,666 every month). Especially as the UK’s cost-of-living squeeze gets ever tighter.
Let’s assume then that someone could only invest £600 every month. In this scenario, assuming the same 9% annualised total return, it would take more like 29 years to reach £1m.
Building a solid foundation
Coincidentally, many oak trees begin producing their first acorns after a couple of decades. But imagine the roots were not solid. What would happen to a tree during a really heavy storm?
Exactly — it would likely come crashing down.
That’s how I feel about portfolio construction. I don’t want to be invested in a load of firms with flimsy financials, whose share prices may crash 50%+ during every market meltdown.
So I hold solid businesses like Visa, AstraZeneca, Aviva, and BAE Systems. These have been consistently profitable and pay out dividends.
On top of this firm foundation, I’ve layered on higher-risk, higher-reward growth stocks, including On Holding (the premium sportswear brand), Applied Nutrition, Nu Holdings (Brazil’s Nubank), and digital healthcare platform Hims & Hers.
A dividend ETF to consider
For someone who doesn’t want to pick individual stocks, though, it would make sense to consider investing in index trackers, investment trusts, and thematic exchange-traded funds (ETFs).
One ETF I like today is iShares UK Dividend ETF (LSE:IUKD). Through this fund, investors get exposure to the 50 highest yielding dividend stocks in the FTSE 350 (excluding investment trusts).
These include Legal & General, BP, British American Tobacco, Rio Tinto, ITV, and Lloyds. So there’s a lot of built-in diversification here.
The ETF’s share price has done really well recently, but that doesn’t include dividends (obviously the main attraction here). Right now, the yield is a solid 4.55%.
As for risks, the main one is that 100% of the companies in this ETF are listed in the UK. And while they’re mostly global firms, they could still be dragged down by domestic issues like a severe recession or political instability.
On balance though, I think this ETF is worth assessing closely for a balanced ISA portfolio.
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Ben McPoland owns shares in Applied Nutrition, AstraZeneca, Aviva, BAE Systems, Hims & Hers, Legal & General, On Holding, Nu Holdings, and Visa.
