DIY Investor Magazine
/
2015 Issue
39
interest would have turned that into £2593.74 – not to
be sniffed at and all the more delicious if it’s sheltered
from HMRC in a tax efficient wrapper.
The Telegraph recently reported that there are
currently believed to be 200 ISA millionaires in the UK
– Barclays Stockbrokers has the most with 69, and one
Hargreaves Lansdown customer has topped £2 million -
and that this number is set to swell to more than 2,000
as savvy DIY investors take advantage of low platform
fees and generous annual investment allowances.
If the current NISA annual subscription limit of £15,240
rises in line with inflation, an investor achieving 5%
return per annum and paying around 1.1% in charges
could achieve a £1 million pot in 27 years and 10 months
– around £500,000 profit on £500,000 investment.
COMPOUND INTEREST IN ACTION
To highlight the differences, let’s consider the potential
outcomes that could be achieved by a steady and
disciplined investor, who we’re going to call James, and
a rather more profligate cove named Jeremy.
James invests £2,000 per year into an ISA from the age
of twenty five until other calls on his money mean that
he stops investing at age thirty five and he never adds
to his pot again.
James then leaves his investment untouched to grow
until his meticulously planned retirement; achieving
an average return of 7% over the 40 years of his
investment means that James’ fund is worth £225,073
by the time he reaches for his niblick.
On the other hand, Jeremy spent much of his hard-
earned cash in his twenties on fast cars, wine, women
and song; some he even wasted, so he came late to the
savings and investment party but when he did latch
on, he did so with gusto, tucking away £2,000 per year
for each of the thirty years following his thirty-fifth
birthday bash.
Jeremy achieved the same 7% average return on his
investments, but despite having invested three times as
much as James - £60,000 against £20,000 – the value
of his pot at stumps was just £202,146 – around 11%
less.
That really is compound interest in action and it is not
difficult to see how harmful inaction can be when there
is the most benefit to be gained from savings and
investment – when you’re young.
On the grounds that you can only start from where you
are, the DIY investor should grasp the nettle and work
out what an investment regime needs to look like to
enable you to achieve your personal goals.
When faced with the prospect of setting an unrealistic
proportion of salary aside because of coming late to
retirement planning, many simply do nothing, and that
can never be the right decision; something is better
than nothing and sooner is always better than later.
If we revisit the example above, by year ten the annual
interest earned is greater than the initial investment and
by year thirty the results can be truly stellar.
Year
Principal
Additional
Investment
Interest
@ 10%
Total
1
£100
£100
£20
£220
30 £17935.71
£100 £1803.57 £19839.28
‘Twenty grand for just an extra hundred quid a year?!’
Well, that takes us back to the risk/reward curve,
which is probably for another day; it’s not impossible
to achieve 10% annual returns, but to do so over such
a long period of time would be to achieve consistently
better results from the stock market than the majority
of the professionals do. Those with disclaimers ringing
in their ears may set more modest objectives.
However, that is not to say that with some judicious
planning and diversification the DIY investor can hope
to do significantly better than the savings rates to be
found on the High Street – as an example, the seven
year retail bond recently launched by Wasps RFC
offered 6.5% p.a. secured against the RICOH Stadium,
although those uncomfortable or unfamiliar with
documents that support such products should always
take financial advice appropriate to their experience
and expertise.
1 – the formula for compound interest’ at the end
