Putting money in a Stocks and Shares ISA then investing it over the course of time is a good fit for my philosophy as a long-term investor. But how high should I aim? Could I try to increase my money 10-fold, for example?
I think I could. And here is how I would go about it.
Making a choice between growth and income
To start, what investment strategy do I want to pursue – growth or income?
Going for growth could make sense, as a 10-fold increase in share value is the sort of result that very successful growth shares might manage. However, identifying such shares can be difficult.
An alternative could be to follow an income-based strategy. It may be easier for me to find high-paying dividend shares than growth picks that grow 10-fold – but it might also take me a very long time to hit my target.
Going for growth
If I wanted to turn £20,000 into £200,000 through buying and holding growth shares, how could I even try to find shares that might grow by a factor of 10?
Some shares do return such an impressive performance. For example, in the past decade FTSE 100 shares Ashtead grew over 12 times and JD Sports more than 13 times. In other words, if I had put £20,000 into JD Sports 10 years ago, I would now have a Stocks and Shares ISA worth over a quarter of a million pounds!
Benefit of hindsight
However, a decade ago that return was far from inevitable. With JD Sports trading at around 7p per share back then, I could have invested in it only to see little or no capital gain in the years that followed.
That uncertainty helps explain why I would never invest in only one share. Instead, I try to reduce my risk by diversifying my portfolio. But it is already difficult to identify a single share that will grow in value 10 times. Picking a portfolio where that is the average return from all the shares is possible — but very difficult.
So although it may be very difficult for me in practice to aim to increase my money 10-fold, if I wanted to try, how would I choose the growth shares?
I would invest in companies with the sort of characteristics Ashtead and JD Sports displayed a decade ago. Both had a competitive advantage in an industry set to enjoy sustained customer demand – and were trading at an attractive price.
Compounding in my ISA
An alternative approach would be to invest in income shares and compound the dividends. That could work to help me meet my target, although the timelines are long. Still, if planning ahead for something like retirement, I think this approach could be useful.
If I achieved an average annual dividend yield of 11%, I could turn £20,000 into over £200,000 in 23 years just by compounding my dividends.
That example assumes constant dividends and share prices. But it demonstrates how compounding can help build long-term wealth.
An 11% dividend yield is high. But I already own companies in my Stocks and Shares ISA that offer that yield, such as Direct Line. Finding more great companies with attractive yields could be a rewarding move for me!