With an empty ISA today, how long would it take to aim for a million?

There are thousands of people in the UK who now have an ISA worth at least a million pounds.

One thing they all have in common is that, at some point, they had an empty ISA, before putting some money in and investing.

Perhaps they did not purposely aim for a million – but they got there anyway!

With the annual ISA contribution deadline falling this weekend, now seems like the ideal moment to reflect on how someone who currently has an empty ISA could aim for a million.

More than one approach

Putting in £20k now before the deadline and then doing the same every tax year, compounding at 5% annually, the ISA would be worth £1m after 26 years.

A much stronger compound annual growth rate of 15% would shave a decade off that timeline, making it 16 years.

Meanwhile, what about someone who does not have £20k a year to invest?

The same approach could still work, but depending on the amount of money put into the ISA it would take correspondingly more time.

Is that worth doing?

With a long enough timeframe, even fairly modest amounts of money invested in the right way can potentially do very well.

Setting realistic goals

You might be reading that and thinking, “right, well obviously it makes sense to aim for a 15% compound annual gain not a 5% one then”.

But that is like deciding to run your first marathon and deciding that doing it in three hours would be better than doing it in five hours.

The reality is that high performance can be very difficult to achieve. Having unrealistic goals can lead an investor to destroy not build wealth by taking badly judged risks.

I think both 5% and 15% compound annual gains are achievable though, at least for some investors.

Going for 5%

Take the 5% example.

At the moment, the FTSE 100 yields 3.1%. That alone could deliver over three fifths of the target.

With some share price growth overall (though most ISAs contain losers, not only winners), I see a 5% target as feasible when sticking to a fairly broad selection of proven blue-chip businesses.

What about 15%?

To hit a 15% compound annual gain over a 16-year period, an investor would need to make some exceptionally good choices about what shares to buy and hold.

An illustration is Diploma (LSE: DPLM). Its share price is up 136% in five years. The past 16 years have seen the share price achieve a compound annual growth rate of 25%.

That is before considering the dividend. Though only 1% today, someone that bought at the far lower price 16 years ago would now be yielding around 34%.

Why has Diploma done so well over the long term?

It has a clear, proven strategy and business model. It focuses on areas where it can add value for clients.

Many of the products it distributes are critical for customers, giving it pricing power and helping it ride the economic cycle.

At its current price-to-earnings ratio of 45, the company is too expensive for my taste. Risks include a slowdown in demand for aviation-related products hurting revenue, as airlines need to trim budgets as jet fuel prices surge.

Other companies that look cheaper to me now also have those characteristics…

The post With an empty ISA today, how long would it take to aim for a million? appeared first on The Motley Fool UK.

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C Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diploma 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.

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