Building a £1.1m portfolio with compound interest in a Stocks and Shares ISA!

Group of young friends toasting each other with beers in a pub

Group of young friends toasting each other with beers in a pub

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The number of ISA millionaires in the UK has surged to over 4,000, according to HM Revenue & Customs (HMRC) figures. That’s a near tripling from the figures released in 2019/20. Clearly these investors are doing something right in their Stocks and Shares ISAs.

Here, I’m going to look at how long it might take me to build a seven-figure portfolio investing in stocks. Due to the power of compound interest, it’s not as long as some people might imagine.

Passive or active investing?

I think the biggest decision an investor needs to make at the outset of their stock market journey is whether to invest passively or actively pick stocks.

Passive investing is arguably a lot less hassle, as my money would usually be spread across hundreds or even thousands of different companies. By owning tracker funds, as they’re called, my money will simply follow the price of an index up and down over time.

I should note that the performance of each index can vary dramatically and no average return is ever guaranteed.

Active investing can be slightly more risky because I’m choosing to pick individual stocks. That comes with a myriad of risks, from disappointing earnings results to outright bankruptcy.

Plus, this approach is more time-consuming, as I’d have to research individual shares and keep up to date with the companies I choose to invest in.

Market-beating stocks

One huge potential benefit of active investing, though, is that I might find market-beating stocks that turbocharge my returns. While this isn’t easy, it is possible.

For example, in my own portfolio, I see that programmatic advertising firm The Trade Desk is up 101% year to date. That blows the tech-heavy Nasdaq 100 index (which it is part of) completely out of the water. And that index itself is no slouch, having risen 43% in 2023.

That said, I do hold a small number of passive investments as well. That means my returns come from index funds, investment trusts, high-yield dividends, and growth stocks that hopefully outperform.

Investing like this, I’m aiming for an average 10%-12% annual return over the long term.

Harnessing compound interest

However, let’s assume I ‘only’ achieve an average 10.5% annual return investing £200 a week (or £10,400 a year) in my ISA. What could that look like after 25 years?

Here’s what this compound interest calculator tells me.

Total value
5 years £64,128
10 years £169,775
15 years £343,824
20 years £630,560
25 years £1,102,942

Having started from scratch, I would have a £1.1m ISA after just 25 years.

The amazing thing is that only £260,000 of this would have been from my own savings. The rest would be generated through compound interest.

However, £10,400 is only just over half the annual ISA allowance. Maxing out the limit with the same 10.5% return, I’d have £2.1m after 25 years. And I’d reach £1m after just 18.5 years!

Foolish mindset

For me, the biggest takeaway here is that I’ll need to keep a long-term investing mindset. Rome wasn’t built in a day, as they say, and neither is a seven-figure ISA portfolio.

But I find it inspiring that over 4,000 investors are already sitting on £1m+ portfolios. It fuels my own motivation to keep on investing in stocks.

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