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According to Hargreaves Lansdown, the average UK employee has £262 left at the end of the month to save and invest. That may not seem like enough money to target a £1m Stocks and Shares ISA. But the mathematical ‘miracle’ of compounding — where investment profits generate their own gains, accelerating growth — means that a modest regular investment like this can snowball to create life-changing wealth.
Here’s how an investor could target a million pound ISA.
1) Diversify for strength and opportunity
The first rule every investor should consider is to diversify their holdings.
No one gets all of their stock picks right — even legendary investor Warren Buffett has made several bad calls down the years. Putting all the eggs in a single basket can destroy an investor’s ISA targets if the bet doesn’t pay off.
Here at The Motley Fool, we believe a portfolio of 25 stocks should be the minimum. Spreading investment across sectors and regions not only helps to reduce risk. It also provides a large range of opportunities to make capital gains and passive income.
In my own portfolio, I hold shares as diverse as financial services businesses Aviva and HSBC, drinks manufacturer Diageo, miner Rio Tinto, housebuilder Persimmon, and tabletop gaming specialist Games Workshop.
2) Buy US shares
Building that diversified portfolio by including US shares could be the next block in our wealth-building plan. Over time, the returns on Stateside stocks have clobbered those generated in every other major market.
Exchange-traded funds (ETFs) like the HSBC S&P 500 ETF (LSE:HSPX) are great ways to consider getting such exposure. This fund owns many of the world’s biggest and brightest companies. And with several hundred different holdings, it more than delivers the diversification benefits described above.
Major holdings include microchip maker Nvidia, smartphone maker Apple, card operator Visa, and drug manufacturer Eli Lilly. We’re talking about global market leaders here, and ultra-rich companies with long track records of innovation.
Past performance is no guarantee of future profits, of course. And rapidly changing political policy in the US could impact future returns, from the introduction of trade tariffs to tighter immigration rules.
However, there are also strong reasons to expect US shares to continue outperforming on the global stage. These include the resilience and size of the US economy, robust consumer spending, access to deep capital markets, and a business-friendly tax environment.
Turning £262 into a £1.3m ISA
Our S&P 500 ETF has delivered an average annual return of 13.7% since its creation in 2010. If this continues, a £262 monthly investment here over 30 years would turn into £1,343,521.
This would then generate an annual passive income of £80,611, if invested in 6%-yielding dividend shares. I hold this fund in my own portfolio, and plan to increase my holdings when I next have cash to invest.
