Here’s how much an ISA investor needs to put away to aim for a million
It’s the dream of every serious ISA investor to build a million-pound portfolio, and it’s possible, too.
Government figures shows the UK has 4,850 Stocks and Shares ISA millionaires, and their numbers will only grow over time.
That’s impressive, given that the ISA contribution limit is just £20,000 a year. But clearly, it can be done. The key ingredient is time. It won’t happen overnight.
Now here’s the twist. Once you’ve made your first million, building the second one is a much faster job.
Making big money from FTSE shares
Online investment platform AJ Bell has put a figure on how much an ISA investor needs to tuck away each month to make £1m within 25 years. The magic number is £1,433 a month. Or £17,196 a year.
This assumes an average annual compound total return of 6%. That’s actually below the average long-term return on the FTSE 100, which is just under 7%. If an investor managed that, they’d blast through the £1m mark by investing £1,250 a month over a 25-year stretch.
So what about that second million? If the investor continued to put away £1,433 a month, that would take them just 10 years — less than half the time. That’s because our investor is also getting growth on the £1m they’ve already accumulated.
Laith Khalaf, head of investment analysis at AJ Bell, said your first million is the hardest. “Hitting new milestones becomes increasingly easy because you have a huge tailwind from growth on the money you’ve already stashed away.”
Compound growth is a formidable force, but you have to be diligent and patient to harness its power, he added. “Clearly, the higher the return you achieve on your investments, the more powerful the effect.”
In an attempt to maximise my own returns, I buy individual stocks rather than investment funds. I don’t put any of my long-term savings into cash. While savings accounts offer security, equities should deliver a superior return over time.
Imperial Brands offers both income and growth
FTSE 100 tobacco maker Imperial Brands (LSE: IMB) has shown how well stocks can do, with a fair wind. Its shares are up a mighty 50% over the last year. Over five years, they’re up an impressive 75%.
The total return will be much higher, as investors will have had bountiful dividends on top. Today, the trailing yield is a generous 5.6%.
Smoking is a declining market but Imperial Brands has fought hard to maintain its share through strong brands and diversification into vaping and heated tobacco. The board has also focused on reducing debt and returning capital to shareholders, to maintain its financial stability.
Cigarette manufacturers remain under constant regulatory attack, while health concerns may eventually hit sales in emerging markets too. Plus there’s stiff competition in the next-gen market, from larger rivals such as Philip Morris and British American Tobacco. I don’t expect Imperial Brands shares to maintain recent stellar growth, but they’re worth considering for a long-term buy and hold.
Every company has risks, which is why I’ve built a balanced portfolio of around 20, so if one or two underperform others will hopefully make up for it.
Sadly, I can’t afford to put away £1,433 a month, so I won’t be making my million. But as AJ Bell figures show, it can be done. Given time.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. 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.
