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Investing in a Stocks and Shares ISA is a fantastic way to build wealth tax-free. But let’s say an investor has maxed out their annual allowance and put £20,000 in their ISA. How much money could they realistically make in the next five years?
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.
Projecting earnings
Theoretically, there is no limit on how much money an investor can make in the stock market. A successful investment in a tiny penny stock could yield transformative gains that might even push someone into millionaire territory.
Sadly, penny stocks are exceptionally risky bets that nine times out of ten end up failing miserably. In fact, there’s a good chance wealth will be destroyed rather than created. So, expecting such an explosive return will likely leave investors disappointed.
However, there are plenty of other non-penny stock opportunities to explore. And for those wanting to take the index fund investing approach, the FTSE 100 has historically offered an annualised return of around 8% per year. Assuming this pattern continues between now and 2030, a £20,000 ISA investment could grow to £29,800 with no additional capital.
Yet for the investors willing to get their hands dirty with stock picking, the gains could be far more impressive while still staying in the land of large- and mid-cap stocks.
Unlocking impressive returns
Let’s look at the engineering group, Senior (LSE:SNR), as an example to consider. As a quick crash course, the business designs and produces critical components for original equipment manufacturers operating primarily within the aerospace & defence sector. And in the last five years, it’s proven to be a tremendous performer, climbing by almost 270% before counting dividends.
That’s the equivalent of a 29.9% annualised return, transforming an initial £20,000 investment into a whopping £87,570!
These market-beating returns were driven by a variety of factors largely revolving around operational improvement. Since 2020, the company has secured a series of new contract wins that boosted its order book, pushing both revenues and profits higher while simultaneously streamlining operations and bolstering margins.
Today, there’s still a strong bull case for investors:
- The streamlining continues with management aiming to dispose of its loss-making aerostructures segment.
- Its core civil aerospace income continues to rise as build rates by Boeing and Airbus climb higher.
- And the fleet modernisation cycle, where airliners are replacing their planes with more fuel-efficient aircraft, is accelerating, driving more demand.
Taking a step back
There’s a lot to like about this business. But it still has its weak spots. Even with restructuring progress, profit margins are still pretty thin relative to its competitors. And even with good execution, there’s no guarantee it can catch up to its more nimble rivals. This is particularly problematic given the large amount of outstanding debt on the balance sheet and currently thin coverage of interest payments.
With that in mind, should its cyclical cash flows suffer an unexpected slowdown, its recent share price gains could struggle to keep up with its recent track record. And in the worst-case scenario, they could actually reverse.
I still see growth potential here for a Stocks and Shares ISA. So, investors may want to consider taking a closer look, but it’s essential to weigh both the risk and potential rewards.
