I’m a big fan of the Stocks and Shares ISA. It offers me a tax-efficient vehicle, letting me invest free from capital gains and income tax.
Like many other investors, my Stocks and Shares ISA isn’t looking too healthy right now. But it could be a lot worse. I’m up a little over the year, and I know many people who have lost money.
In the long run, I want to grow this tax-free pot and, maybe, if I’m lucky, join the select group of people who have become ISA millionaires.
So here’s how I’m doing it!
Using the Stocks and Shares ISA
The Stocks and Shares ISA is a tax-free investment where I can invest in the stock market through funds, bonds or shares in individual companies.
This financial year, I can contribute up to £20,000. And that hasn’t changed for a few years now. If I can, I’ll try to use all of my allowance each year. But that’s not always possible.
I manage my own Stocks and Shares ISA using the Hargreaves Lansdown platform. The platform is intuitive and it gives me the ability to buy and sell shares in real time. The ISA is like a wrapper, and I can invest in stocks and shares within it, tax free.
My millionaire strategy
Well, I’ve been crunching the numbers and it’s not easy. It requires me to use something called compound returns. This is the process of reinvesting my dividend earnings and gaining interest on my interest.
Let’s pretend I’m starting now, and I invested £20,000 a year in stocks offering a 5% dividend yield over the next 25 years while reinvesting my dividends every year.
After 25 years of reinvesting my profits, I’d have £1.06m. That’s pretty good but its hard going and requires me to invest £1,666 every month for the next 25 years. However, the great thing about compound interest is the longer I leave it, the more it grows.
So if I were to start with a £20,000 pot and then invest just £800 a month (£9,600 a year) for 35 years, at the end of the period I’d have £1.02m.
Naturally, the bigger the pot I start with, the easier it is to reach millionaire status.
If I’m investing for a long period of time, which I am, I’ll need to pick companies that aren’t going to fail. I want to be looking at banks, investment platforms, insurers, and not tobacco companies or fast food eateries.
And that’s what I’m doing right now. I’m investing in companies like Lloyds, Hargreaves Lansdown and Legal & General. Because I’m confident these firms are still going to be in business in a few decades time. And because they provide me, as a shareholder, with an attractive return on my investments.
The post How I’m aiming to become a Stocks and Shares ISA millionaire! appeared first on The Motley Fool UK.
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James Fox has shares in Lloyds, Hargreaves Lansdown and Legal & General. The Motley Fool UK has recommended Hargreaves Lansdown and Lloyds Banking 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.