Stocks and Shares ISAs are amazing wealth-building tools. By eliminating the pressures of capital gains and dividend taxes, investors can grow their portfolios at a much faster pace compared to a traditional brokerage account. And given sufficient time, even a small ISA can grow into a mountain of wealth.
So with that in mind, let’s explore a potential path to building a half-million-pound ISA.
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.
Getting started
As with all investment journeys, it begins with saving some capital. It doesn’t take much to get the ball rolling. But to kick things off at a decent pace, having £5,000 is perfect. So now the question is how can this money be put to work?
The easiest solution is an index tracker fund. These investment vehicles simply mimic the performance of an underlying index like the FTSE 100. The UK’s flagship FTSE index has historically generated an average return of around 8% a year over the last 30 years. And assuming it maintains this pace, it would take approximately 58 years to turn £5k into £500k.
Needless to say, that’s painfully slow. So let’s accelerate this process by topping up the ISA with £500 each month. Regularly investing this capital each month would cut the waiting time from almost 60 years to just 25 – more than half!
That’s already sounding more promising, but how can investors speed things up even further?
Instead of relying on index funds, investors can take matters into their own hands and start picking stocks directly. This strategy definitely increases the difficulty curve for investors since it requires significantly more diligence, discipline and research. And it undoubtedly comes with more risk, which means we could lose money rather than make it.
Investing for maximum growth
Investing in bad businesses is a proven recipe for destroying wealth. And even buying shares in the best companies on the planet can still backfire if the wrong price is paid. However, if executed correctly, this strategy opens the door to higher returns.
Even if a stock picker only manages to eke out an extra 2% over a FTSE 100 index fund, that’s enough to wipe out another four years from the waiting time, or earn an extra £223,000 when waiting the full 25 years.
In some cases, gargantuan returns can be achieved, which is the story of Ashtead Group (LSE:AHT). What started out as a small equipment rental business in Surrey has exploded into a global industry titan, with the bulk of sales now originating from North America.
Its phenonmenal success has resulted in a stellar share price and dividend performance over the last two decades. So much so that over the last 25 years, a £5,000 intial investment is now worth just over £4m!
Looking at its latest results, Ashtead continues to deliver and maintain impressive cash generation that funds growing dividends. But the group still has plenty of risks to tackle, especially in the form of increasingly severe weather conditions. Bad weather delays construction projects and, therefore, directly impacts the demand for its services.
Personally, even with these risks, I still view Ashtead as a top-notch company. But for investors seeking stellar returns, the firm seems unlikely to deliver such explosive returns again.
For that, investors will have to start hunting in the realm of small-caps, like Ashtead once used to be.
This post was originally published on Motley Fool
