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A Stocks and Shares ISA can be an excellent way for an investor to try and build wealth. Some may aim to do that in the short- to medium-term. But I see serious attractions to long-term investing, not least the opportunity it allows for brilliant shares to show their true potential.
Let me illustrate by demonstrating how an investor could aim to turn a £5,000 ISA today into one worth £100,000 in future – if they are willing to take the long-term approach.
Thanks to the ISA structure, for many investors that gain could even be completely tax-free (well, up to a point: the UK imposes stamp duty on individual share transactions of a certain size even inside an ISA, after all).
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.
Looking to the future
The easy part is the maths.
At a 10% compound annual growth rate (CAGR), turning £5k into £100k would take 32 years.
At a 15% CAGR, it would take 22 years. In the context of an ISA, I do not even see that as a particularly long time in the grand scheme of things especially when a 20-fold return is concerned.
Investing to build wealth
But while a 15% CAGR may not sound especially challenging, it definitely is.
It is hard for many investors to achieve that sort of return in any given single year. Achieving it on average year after year for decades, through good markets and bad, is even tougher.
I believe it is possible, though, if an investor takes time to do their homework and builds an ISA stuffed with carefully chosen shares in companies that have excellent future profit creation potential, but a weak share price when bought.
To illustrate how such an approach could work in practice, consider Ashtead (LSE: AHT). Over the past five years, its share price has shot up by 125%. It also offers a 2.3% dividend yield to boot.
The thing is, five years ago, Ashtead was already an excellent business hiding in plain sight.
Why do I say that?
For one thing, now as then it operates in an attractive market. Demand for hire equipment on building sites is often strong (though of course one risk is a housing downturn leading to lower demand, hurting revenues). As the cost of work on a site stopping can be high, companies that rent it out have pricing power.
Ashtead has a proven business model. Its large customer base, extensive depot network, and large asset base of equipment are all competitive strengths. That was true five years ago – and it it true now.
Despite that excellent share price performance over the past five years, Ashtead trades on a price-to-earnings ratio of 16. That is not cheap but it is attractive enough that I see it as a share investors should consider.
It also illustrates that, while achieving a 15% CAGR with a diversified portfolio is challenging, it is possible.
Getting ready to invest
The first move, of course, is having the right Stocks and Shares ISA to put the £5k in and set the wheels in motion.
With lots of options on the market, it pays to compare some choices as each investor’s needs are different.
After all, keeping a close eyes on fees and costs can also help boost the ISA’s CAGR.
