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Investing in a Stocks and Shares ISA is arguably the most effective way to build wealth in Britain. And starting early allows young investors to maximise the rewards. In fact, a 30-year-old investor planning to retire at the age of 67 could become a multi-millionaire with just £500 a month. Here’s how.
Retiring with £2.3m in the bank
The average return generated from the stock market varies depending on what investments are made. But here in the UK, that return’s typically sat between 8% for large-caps and 10% for small-caps annually over the last 30 years.
For someone who’s just turned 30 and has no savings, securing that upper rate of return with a £500 monthly investment will grow to £2.3m when compounded over 37 years. And for those earning enough to maximise their annual ISA allowance (£1,667 a month), their retirement wealth could be a staggering £7.8m! And unlike when using a Self-Invested Personal Pension (SIPP), that money can be withdrawn all at once with zero taxes to pay.
Of course, in practice, consistently earning a 10% annual return isn’t easy. In fact, even when relying on an index fund, some years will be far better than others. And similarly, over a 37-year time span, chances are an investment portfolio will go through multiple corrections and crashes that could leave investors with less money than expected come retirement.
Nevertheless, even earning half of this amount still leaves someone with over £1m in the bank – more than enough to live comfortably by today’s standard.
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.
Earning a 10% return with small-caps
Investing in small-cap stocks opens the door to superior returns. But the small size of these businesses can also make them far more volatile and sensitive to external disruptions.
In other words, aiming for a 10% return with this class of equities is a riskier endeavour compared to investing in boring FTSE 100 companies. Nevertheless, there is a wide range of promising opportunities to capitalise on right now.
One stock that might have the potential to outperform in the long run is dotDigital Group (LSE:DOTD). The digital marketing platform allows small- and medium-sized businesses to automate their marketing campaigns and use artificial intelligence (AI) predictive analytics to maximise engagement.
It’s a tool that’s proving particularly popular among e-commerce stores, resulting in the average revenue per customer quadrupling over the last decade.
Unfavourable product mix with SMS contracts has resulted in margin compression. However, with management refocusing the mix toward maximising profitability, margins are expected to start recovering in 2025. And with the fundamentals now catching up to its previously lofty valuation, the stock’s recent flat performance may soon improve.
What could go wrong?
Seeing new and existing customers spend more money each year is an encouraging sign. As is the group’s impressive free cash flow generation, something that’s rare for a small-cap stock. However, that doesn’t make it a guaranteed winner.
Despite my bullish stance, there are still some notable risks and challenges to consider. The digital advertising market is highly competitive with a lot of rivals sitting on big cash war chests. And so far, the group’s progress regarding its expansion into international markets like Japan have been underwhelming.
Nevertheless, if dotDigital can overcome these hurdles, the investment returns could be a further-research candidate as it may prove helpful in growing a Stocks and Shares ISA towards millionaire territory.
