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Investing in stocks and shares through an ISA offers a powerful route to long-term wealth creation. For an investor aiming to transform a £20,000 ISA into a £1m portfolio, the most important factors are time, consistent contributions, and the power of compounding.
Compounding is key
Compounding occurs when investment returns are reinvested, allowing gains to generate further returns. For instance, if an investor achieves an average annual return of 10%, a £20,000 investment could potentially grow to £1m in about 38 years without any additional contributions. While this is a lengthy period, starting early allows compounding to work more effectively.
Regular contributions can accelerate this journey. If the investor adds £5,000 each year to the initial £20,000, reaching the £1m milestone could take less than 25 years, provided that returns average around 10% per year. Making full use of the annual ISA allowance, currently set at £20,000, will further enhance the growth potential.
Investing can go wrong
Selecting suitable investments is vitality important. A Stocks and Shares ISA enables an investor to access a range of assets. This includes individual shares, investment funds, and exchange-traded funds (ETFs).
Historically, broad stock market indexes have delivered average annual returns of 8% to 10% over the long term. By diversifying across sectors, industries, and geographies, an investor can reduce risk and smooth out short-term market volatility. However, investors who make poor decisions often lose money.
Patience and discipline remain vital throughout the process. Markets will inevitably experience fluctuations, but maintaining a long-term perspective and resisting the urge to withdraw funds during downturns can be key to success.
Regular portfolio reviews help ensure that investments remain aligned with the investor’s goals and risk tolerance. Through early action, consistent investing, and the relentless effect of compounding, an investor can realistically aspire to grow a £20,000 ISA into a £1m portfolio over time.
Where to put my money
Diversification is key. And right now, with oil rising on the back of Israel-Iran conflict and the US economy potentially moving closer to stagnation, I’m increasingly interested in US tech stocks that might benefit from a weaker dollar. That could mean picking an individual stock like Salesforce or a diversified investment trust like Scottish Mortgage Investment Trust (LSE:SMT).
Scottish Mortgage Investment Trust is a standout for pound-denominated investors seeking exposure to leading US technology companies. Managed by Baillie Gifford, the trust has delivered sector-leading performance over the past decade, with shareholders up 276% in the 10 years to March 2025.
Its portfolio is heavily weighted towards innovative US tech giants, including Amazon and Meta Platforms. The trust’s portfolio also includes significant positions in private technology firms like SpaceX — the largest holding.
Recent performance has been buoyed by advances in artificial intelligence and semiconductor demand, with the trust’s net asset value rising by 11.2% in the year to March 2025.
However, Scottish Mortgage employs leverage to amplify returns, which can increase both gains and losses. This use of debt introduces additional risk, particularly during periods of market volatility or when growth stocks fall out of favour.
Investors must weigh this risk against the trust’s long-term growth potential. It’s something I’m happy to put up with for the long-term returns. It’s an integral part of my portfolio.
