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Sometimes, it can seem as if investing on a small scale might not be worth the time and effort. With a Stocks and Shares ISA having a standard annual contribution allowance of £20k, putting a few pounds in here and there may seem as if it is missing the point somewhat.
In fact though, I see the flexibility of the ISA structure as one of its attractions.
While there is a maximum annual contribution, there is no minimum for the investing vehicle (though some providers may have one for their customers), meaning it can be very flexible.
Say someone starts putting £5 a day into a Stocks and Shares ISA today. What might it be worth in future?
Three key factors that determine the outcome
To answer that question, we need to know (or at least estimate) three important pieces of information.
One is the amount invested. In this example, I will use a fiver a day.
The second factor is the compound annual growth rate (CAGR). That consists of any dividends and increases in share valuations, though falling share prices can eat into it. Fees, costs and commissions can also eat into the CAGR, so it pays to choose a Stocks and Shares ISA carefully.
In this example, I will presume a 5% compound annual growth rate.
The third variable is time. The longer the timeline, the more the portfolio can benefit from two distinct things – the ongoing daily £5 contribution, and previous gains being compounded.
So for example, after five years, the ISA ought to be worth over £10k. After a decade – twice as long – it is worth more than double, thanks to the compounding effect, at £23,480. After another decade the ISA ought to be worth around £61,726. Time is an investor’s friend.
Setting realistic goals
In fact, I think a 5% CAGR target is fairly modest. The current FTSE 100 yield is a little over 3%, while over time the index has grown handily – 48% in the past five years.
That is the whole index – a portfolio of the better-performing shares within it would have done even better.
Hindsight is a great thing though, and past performance is not necessarily a guide to what to expect in future. So I have used a 5% CAGR as a goal even though I think it is fairly conservative from a long-term perspective, because I see it is as likely achievable while sticking to well-known, proven shares.
Could this be a share to help?
To illustrate, one share I own that I believe can hopefully achieve such a target is Dunelm (LSE: DNLM). The FTSE 250 homewares retailer yields 5.2% — and that is before even considering the special dividends it has paid fairly regularly.
That seems promising – but the share price has fallen 32% over the past five years. That is less impressive!
The fall reflects risks such as cost inflation eating into profit margins and a weak housing market hurting demand for items to kit out new homes. Still, I reckon the fall has been overdone and see the share as undervalued.
Dunelm has a proven, profitable business model, strong brand awareness and a large range of branded items that help set it apart from rivals. I see it as a share worth considering right now.
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Christopher Ruane owns shares in Dunelm.
This story originally appeared on Motley Fool
