I’m looking at how to invest my new Stocks and Shares ISA. A new tax year brings a fresh £20,000 contribution limit, and I want to maximise mine to target a million as soon as possible.
It might sound a tad far-fetched to turn £20k into £1m. If investors expect to do so within just a few years, it certainly doesn’t sound feasible to me. I’d need to grow my ISA by 50% a year for a decade to achieve this goal.
Growing a Stocks and Shares ISA
But as the average long-term stock market return is around 10% a year, I’d need a more realistic timeframe. Investing works best over long periods. By doing so continuously for around 40 years, I calculate I should comfortably reach my £1m target.
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Now if that sounds too long to wait, there are a few factors I could alter to reach my goal sooner.
For instance, the numbers change dramatically if I’m able to invest £20k every single year instead of just once. In this scenario, I calculate I’d reach £1m within less than half the time – approximately 19 years.
That may not be easy for many people. Alternatively, I could try to beat the average stock market return by researching and selecting a group of high-yield or fast-growth shares. By targeting 15% a year, I could potentially reach my goal. But would this be sensible?
Number one strategy
Investors have multiple ways to invest in the stock market. Strategies range from simple to complicated, risky to less risky, and easy to hard.
Complicated, risky and difficult strategies don’t equate to greater returns, in my opinion. That’s why I favour relatively simple strategies with moderate risk.
To me, that means owning a basket of good quality companies that operate in steadily growing markets.
Shares can be placed in various groups such as growth, value, quality, and income. As I’m aiming to grow my portfolio over time, I’d favour a combination of growth and quality factors.
The specifics
More specifically, I’d look for shares that offer a return on capital employed of over 20%. This is an excellent measure of business quality. Popular investor Terry Smith frequently mentions it as a key attribute too.
Earnings are key to any business. I look for shares that offer a steadily growing stream of cash flow. So I avoid those tend to swing from profit to loss and back again.
Alongside earnings, profits are important too. A consistently high profit margin implies it has some form of moat.
This term was made popular by veteran investor Warren Buffett to describe a sustainable competitive advantage. I’d look for an operating profit margin of over 15%.
Which stocks?
So which stocks meet my criteria? Right now, I can see plenty. But with a £20,000 investment, I’d narrow my choices down to around five or six.
If I had spare funds today, I’d buy Games Workshop, Next, Howden Joinery, RELX, and BP. This group offers a return on capital employed of 32% and an operating profit margin of 23%.
I consider all five to be high-quality businesses that I reckon will thrive over the coming years. That’s why they’re my top picks for a Stocks and Shares ISA as I target millionaire status.
