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The Stocks and Shares ISA is a truly wonderful thing. Through one of these beauties, UK investors can build wealth without worrying about tax obligations.
Whatever returns are made are theirs to keep, with the contribution limit set at a generous £20k a year.
But how long could it realistically take to become an ISA millionaire? Let’s take a look.
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.
Powerful wealth-building vehicle
Boiling it down, the two key things are the amount contributed and the return on investment.
In other words, someone generating a 7% average annual return on a yearly investment of £5,000 is going to have to wait a lot longer than another achieving 10% on £20,000 invested every year.
For the former, it would take about four decades to reach £1m, whereas the person maxing out the full contribution limit each year would get there in just 19 years.
Indeed, the difference is so stark that the £20k-a-year ISA investor generating a 10% return would see the value of their portfolio rise above £8m after 40 years!
I should mention that these calculations assume that dividends are retained rather than spent. Ideally, they should be reinvested to fuel the compounding process.
I also haven’t factored in platform fees, which are a real cost that needs to be accounted for (they differ with each provider).
Still, the wealth-creating potential of the ISA is incredibly powerful for everyday investors. Reminding myself of this keeps me motivated to invest regularly.
Which stocks to buy?
There isn’t one single investing style to build wealth in the stock market.
Warren Buffett, for example, built an empire investing in businesses that he understood well. He looked for a margin of safety with the valuation, sticking to established and profitable companies with long track records.
As Buffett memorably put it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. Buying an average company at a high price is a recipe for poor returns in the stock market.
Many other investors have made fortunes taking on more risk by investing in disruptive growth companies. Think Netflix as streaming started taking off 15 years ago, or Tesla in 2012 before electric vehicles went mainstream.
The Goldilocks zone
Arguably, the sweet spot is finding a wonderful company with strong growth prospects that is trading at an attractive valuation.
One potential example I see at the moment is Novo Nordisk (NYSE: NVO). This healthcare giant is a leader in diabetes and GLP-1 weight-loss treatments through brands like Ozempic and Wegovy.
The stock is down a whopping 54% since September!
The reason is that Novo Nordisk has fallen behind arch-rival Eli Lilly in the race to develop a GLP-1 pill (Wegovy is currently an injectable medication). So there’s a risk the company is losing its leading market position in this lucrative space.
Yet Novo Nordisk is still expected to grow strongly over the next few years, according to most analysts. And the global weight-loss market is projected to exceed $150bn in future — far too big to be dominated by any one company.
Meanwhile, the stock is trading at just under 14 times next year’s forecast earnings, and offering a 2.5% dividend yield. At $65, I really like the risk/reward setup and think it’s worth considering.
