Doubling my ISA: what will it take?

To double the value of my portfolio, I need to achieve an annualised return of around 15%. In other words, I need my capital to grow 15% in 2021, another 15% in 2022, and so on. This is how things would look if I used the nominal sum of £1,000.

Compound interest really is a wonderful thing. And this doesn’t include the impact of any reinvested dividends!

So, how do I hit this target?

Clearly, being invested in the best stocks helps. But what makes a company better than others? Everyone will have an idea about this.

A ‘meme stock’ investor would say that AMC Entertainment and GameStop would qualify. I respectfully disagree. Their share prices have certainly ‘popped’ in 2021 but have since flagged. They’re best left to traders, in my opinion. 

Personally, I don’t think I need to take on such risk to get a 15% annualised return. For me, the best ISA stocks are those that are leaders in niche markets, boast fantastic brands, have strong growth potential, and/or generate great returns on the money they invest. I think I have several in my portfolio already. These include kettle appliance maker Strix, equipment manufacturer Somero Enterprises, and online behemoth Boohoo. 

But let’s take a step back here. The fact that something is achievable does not mean it will happen, of course. Let’s briefly look at what things could stop me from achieving my goal.

What could go wrong

Unfortunately, there’s no guarantee my ISA stocks will perform. Last week alone showed just how unforgiving other investors can be with the share prices of Best of the Best and Avon Protection being pummelled. Both have previously scored highly on the things I usually look for.

Even if the companies I own do very well, they could still be held back by general market jitters. These days, investors are getting increasingly worried about rising inflation, for example. And even if this does prove ‘transitory’, there will always be another potential setback waiting in the wings to knock confidence. 

How I can improve my chances

Aside from hoping my stock-picking is on form, there are four other things I think I can do. 

1) Keep investing. This includes periods in which markets head south. It sounds simple but it’s harder to do in practice.

2) Go small. Smaller companies have the ability to grow at rates larger companies simply can’t. This can often lead to a huge uplift in share prices. 

2) Use up my ISA allowance. As well as continuing to invest, it would also be a good idea to use my £20,000 ISA allowance in full. The more money I put to work, the greater the potential impact of compounding.

3) Avoid frothy markets. A final, debatable point is that it might make sense to avoid markets (and companies) where valuations are looking stretched. Having more than doubled over the last year, the US market looks a little too hot to me right now. 

The post How I plan to double my Stocks and Shares ISA in 5 years appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Strix, Somero Enterprises and boohoo group. The Motley Fool UK has recommended Avon Protection, Somero Enterprises, Inc., and boohoo group. 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.

Wait – what’s a meme stock?

Let’s recap. A meme stock is one that, thanks to huge attention on social media sites such as Reddit, jumps in value. As evidence of sizeable gains is posted online, others buy in. The fear of missing out (FOMO) then prompts even more people to do the same. Those betting against the company (short-sellers) are also forced to close their positions, further increasing the price. It’s really that simple.

So far, the most high-profile meme stocks have arguably been US video games retailer GameStop and cinema chain AMC Entertainment. Both have helped many readers of WallStreetBets become rich over the last year. If I’d bought the former on 28 December and sold exactly one month later, for example, I’d have made 22 times my money.

What happens from here?

What happens next is a great question. It’s also one I can’t answer with any real certainty. No one can. This is unchartered water.

That said, the performance of GameStop shares since January does tell us something. In February, they tumbled to $45. By March, they were back to $260. In May, they had fallen to $145. In June, they had climbed back over $300. 

Depending on your particular strategy, this volatility is either a gift from the market gods or the sort of nerve-shredding experience that puts some people off ‘investing’ for life. Regardless, I think it sends a clear message about how volatile meme stocks might be going forward.

So, would I buy?

Based on the December to January returns, you’d likely think me mad to reply in the negative. Who would turn down such an amazing performance in such a small space of time? Nope, not me!

The problem is that hindsight’s a wonderful thing. Investors need to consider not just how they might feel if they’d invested in GameStop last year, but how they’d feel if they bought at the peak and then saw the value of their holding plummet. I reckon the fear of missing out would quickly become the fear of still being in. 

Looking ahead, I’d still struggle to buy a meme stock. As a quality-focused investor, I’m hooked on businesses and/or investment themes that should last. Are GameStop or AMC quality stocks? Nope, not on any metric. Will Reddit readers be looking at them in a year? Probably not.

The really interesting thing about all this is that, because business fundamentals are irrelevant, anything could potentially become a meme stock. Unfortunately, this also makes it hard to know which will be next to gain sufficient traction on social media. It’s fascinating stuff… from a distance.

Ready to gamble?

Meme stocks clearly have the potential to generate big profits very quickly. However, this is risky stuff and not something most Fools would be comfortable with. Anyone entering this arena needs to know they’re at the mercy of the crowd. A love of rollercoasters is essential. 

If my reluctance ever wavered, I’d only ever play with money I could afford to lose. Without an edge, the latter’s likely.

The post Where next for meme stocks? appeared first on The Twelfth Magpie.

More reading

• Back below 500p, is it time to consider BP shares again?
• Is there any value left in Lloyds shares now they’re over £1?
• How much would I need in a Stocks and Shares ISA to target £19,036 a year in second income?
• After huge new nuclear deals, are Rolls-Royce’s sub-£15 shares set to power higher?
• This 7.5% yielding passive income share is at a 13-year low! Time to consider buying?

Paul Summers 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.