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It’s well-documented that there are a fair few ISA millionaires knocking about in the UK. However, these are often people who max out the annual contribution limit — currently £20,000 — or come close to doing so on a regular basis over many years.
But what about someone who has a one-off lump sum of £20k? Well, they can still hope to increase that significantly over 15 years. Here’s how.
The magic of compound interest
When it comes to wealth building, the secret sauce is compounding. That’s because returns come not just from the original investment, but from the returns on the returns. Or interest upon interest.
That’s the great thing about compounding — it works on all sums, small or large.
Of course, it has a more dramatic effect on larger amounts. But consider that £1,000 compounding at 10% per year would reach £1m after 73 years and £13m after a century! That’s without any further injections of cash.
For £20,000, the figure would be around £83,000 after 15 years (taking us to 2040), assuming the same 10% return. And all gains would be free from tax obligations!
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What approach to take?
Now, it should be noted that a 10% annual return isn’t guaranteed, despite that being the ballpark figure of the S&P 500 over recent years. In future, stocks in general may return less than this.
However, I still think this is an achievable goal to aim for, assuming the ISA portfolio is suitably diversified across enough quality stocks.
One I think worth considering right now is Scottish Mortgage Investment Trust (LSE: SMT). This FTSE 100 investment trust aims to deliver market-beating returns through its portfolio of about 100 growth companies.
These include e-commerce and cloud computing giant Amazon, AI chip leader Nvidia, and Facebook parent Meta Platforms. The idea is that this trust is a way to invest in such names without having to buy them individually.
Better still, the Scottish Mortgage share price has fallen 18% since mid-February. This actually means the shares are trading at an 11.7% discount to the underlying value of the portfolio. I find this double-digit discount attractive.
Another thing I like here is that the trust offers exposure to unlisted companies that cannot be bought on the stock market. For example, its largest holding today is Space Exploration Technologies (better known as SpaceX). This firm is an undisputed global leader in launching reusable rockets.
What could go wrong?
Naturally, any investment here would be a vote of confidence in the managers’ ability to identify the right stocks. That has worked out well for investors in the past — the share price is up around 250% in the past decade (above 10% a year) — but that’s not assured to continue.
One risk I see in the near term is a global recession. This would be bad for the stock market in general, but would likely hit the valuations of growth shares harder than most. So a high degree of volatility is to be expected with this stock.
On balance though, I continue to view Scottish Mortgage as one of the most attractive ways to invest in the digital revolution. Over a 15-year time frame, I think the stock could contribute nicely to an ISA portfolio’s growth.
