Becoming a Stocks and Shares ISA millionaire is a common financial dream. Yet despite popular belief, turning this dream into a reality is achievable through consistent long-term investing. In fact, even if I were to start from scratch today with only a small lump sum of £2,500, millionaire status is still within reach.
Making a million in a Stock and Shares ISA
On average, the stock market generates an average return of around 10% per year. And I can replicate this performance by simply buying shares in an exchange-traded fund (ETF) that tracks an index like the FTSE 100 or the S&P 500.
The plan is to leverage the power of compounding so that my money makes money, which then helps to make more money. For example, a £1,000 portfolio at a 10% return would generate £100 in the first year. Now I have £1,100. So in the second year, my 10% now makes £110. Over time, the returns generated each year get larger, leading to a snowball effect that can mean substantial wealth over the long term.
So, let’s say I’m starting with a lump sum of £2,500. And unlike my previous example, I can top up my Stocks and Shares ISA by £250 every month using money from my salary. How long will it take to reach millionaire status at a 10% annualised return?
The answer is approximately 35 years, if everything goes to plan (which, of course, isn’t guaranteed). For me, that’s just in time for retirement. But I can’t deny that three-and-a-half decades is long. So, is there a way to accelerate this process?
Speeding up the process
There are actually two ways I can go about accelerating my investing journey.
- Increase the amount I add to my Stocks and Shares ISA each month.
- Attempt to increase my annual return through stock picking.
The first is the easier method. Let’s say I get a pay rise at work or optimise my spending and can now contribute £500 a month? How long will it potentially take to become a millionaire investor now? About 29 years.
That’s shaved off about 20% of the waiting time. But I can take this a step further by also deploying option two. Instead of investing in an ETF fund, I could choose to pick individual stocks myself. This approach is undoubtedly a riskier strategy and requires a lot of research, commitment, and emotional discipline. It also means I need to be aware that my investments could underperform or even fail. But suppose I can find high-quality companies generating lots of sustainable free cash flow? In that case, I should be able to boost my average annual return.
Even if it’s only by 2%, the rewards can be worthwhile. In fact, my £2,500 portfolio with a £500 monthly contribution at a 12% annualised return would transform into a million in just 25 years – a decade faster.
This post was originally published on Motley Fool
