Here’s how I’d use a £20,000 Stocks and Shares ISA to aim for £1 million

The idea of becoming a Stocks and Shares ISA millionaire probably sounds fanciful to many people. Yet the numbers prove that it’s possible over time, even for someone starting from scratch.

Here’s how.

First things first

For starters, I’m going to assume that I’ve opened my Stocks and Shares ISA with a reputable broker. I personally prefer platforms that don’t levy trading fees, though some that do also have research and resources that can be helpful. This will depend on personal preference.

The ISA lays the foundation to the whole £1m project because I can invest up to £20k a year and not have to worry about tax implications. Any returns I make, including both capital returns from share price gains and dividend income, is tax-free. Wonderful.

Next, I’d need to decide what type of stocks to buy. Of course, most people would probably say “the ones that are going to go up“! But here’s the catch: not all shares end up making returns for investors.

Therefore, I’d set aside time to familiarise myself with financial statements and learn how to value stocks. Alternatively, there are services, including those from The Motley Fool, that can do much of the heavy lifting.

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.

Going for growth

One starter stock that would be part of my portfolio is Scottish Mortgage Investment Trust (LSE: SMT). I’ve held it for many years and continue to rate it very highly.

So what does it do? Well, it has nothing to do with mortgages in Scotland. In fact, this rather boring-sounding investment trust is invested in some of the most exciting growth companies in the world.

We’re talking well-known names like Amazon, Tesla, Spotify and Netflix. In the high-growth realm of artificial intelligence, it has positions in chip designer Nvidia and Taiwan Semiconductor Manufacturing Company, the world’s largest chipmaker.

Another top position is Dutch firm ASML, which has a virtual market monopoly on extreme ultraviolet (EUV) lithography systems. These incredibly complex machines use light to create tiny patterns on silicon wafers, which are needed to produce cutting-edge computer chips.

There would be no modern-day technology revolution without these EUV machines, arguably making ASML the most important company that few people know about.

The trust also holds shares in Elon Musk’s rocket firm SpaceX. Now valued at around $210bn in the private market, the company is laying the foundations for the burgeoning space economy.

The thing to remember about this trust is that it’s only invested in growth stocks. Were these to fall out of favour with investors, which does happen, the Scottish Mortgage share price would suffer.

Nevertheless, I think it’s a good pick to add a bit of growth to a well-rounded portfolio.

Getting to a million

By investing in stocks like these, I’d hope to generate an average 8.5% return long term. This could come from a combination of growth and dividends (which I would reinvest).

While an 8.5% return may not sound much, it quickly adds up when investing £850 a month (or £10,200 a year).

In this example, I’d reach £1m inside 28 years. If I managed to max out my £20k ISA limit every year — equivalent to £1,666 a month — the figure would be £2.15m, assuming the same 8.5% return.

This post was originally published on Motley Fool