Is it possible to reach £1m via a Stocks and Shares ISA? I’d say it is. And I could even do it by starting with a modest sum and adding regular payments over a long period.
There’s a little more to it that just picking a few shares, of course. With thousands of potential stocks and funds to pick from, what should I buy to reach my million-pound goal?
First, I’d consider how much I need to invest and for how long. The average long-term stock market gain works out to be around 8% a year. Assuming this rate of return, I calculate that I’d need to invest £500 a month over 35 years to reach £1m.
Note that I’d be adding £210,000 into my Stocks and Shares ISA during that time. But I’d expect the power of compound returns to amplify my pot to over £1m.
Stocks and Shares ISA strategy
So what should I invest in? I could just buy a FTSE 100 or S&P 500 index tracker. I’d set up these low-cost instruments on an automated plan to drip-feed £500 a month. That way, when share prices fall, I’d automatically be taking advantage of lower prices.
Historically, stock market crashes have proved to be good opportunities for long-term investors. But it’s not always possible to predict the bottom. With an automated plan, I wouldn’t have to.
Beat the market
I could also try to beat the market by picking individual shares. For instance, if I’d bought shares in sports retailer JD Sports a decade ago, I would have achieved a 35% annual return. That’s a phenomenal return by any standard.
Such winners could fast-track my Stocks and Shares ISA on its journey to £1m. But how can I find them for the coming years?
By diligent research and analysis, I’d hope to pick many winners. They’re sometimes hiding in plain sight and day-to-day observations can uncover shifting trends.
For instance, I might have noticed that JD was managing to take advantage of the trend towards more athleisure clothing.
I might also have noticed several high-quality attributes that I look for in a company. A decade ago, it operated with a 20% return on capital employed, a 3% dividend yield, and at an undemanding price-to-earnings ratio of 9 times.
Looking ahead
If I look for these criteria today, I find several British shares, including Supreme, Luceco and Somero Enterprises. One thing to bear in mind is that they’re relatively small businesses. But to that I’d add investor Jim Slater’s famous quote, “elephants don’t gallop”.
Smaller companies are more likely to double or triple in value compared with mega-cap giants like BP or Tesco.
Bear in mind that picking individual shares can involve more risk. Share prices can be more volatile than index trackers. Smaller companies in particular can often have less resilience than their large-cap siblings.
That’s why I’d consider both strategies for my Stocks and Shares ISA. I’d invest £250 a month into an index tracker and £250 a month into my individual top picks. That way, I can spread my risk and get the best of both worlds.
The post How I’d invest £500 a month in a Stocks and Shares ISA to aim for a million appeared first on The Motley Fool UK.
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Harshil Patel has positions in BP. The Motley Fool UK has recommended Somero Enterprises, Inc. and Tesco. 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.