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Building a million-pound investment portfolio with a stocks and shares ISA1 might sound like a distant dream for most investors, but it’s feasible for some – and doubtless more people if we lower the target to a still-desirable half-million-pound or quarter-million-pound portfolio.

Just how feasible is down to the amount of money you’re able to put away into your ISA each year. But it’s also down to the fees you pay. The task of saving enough money is hard enough as it is, so why would you want to make it even harder for yourself by giving up a large chunk of your hard-earned returns to somebody else?

It’s something to think about as we approach the end of the tax year and attention turns to using as much as possible of your 2020/21 ISA allowance – before it disappears. Because whether you're chasing a million, or have more modest ambitions, the ISA fees you pay can have a huge impact on your investment outcomes.

Time in the market

First, let us consider the crucial role that time plays when trying to get to a million pounds – after all, the maximum you can currently save in an ISA is £20,000 a year, so getting to £1,000,000 is going to take quite a while.

Think of it this way, 20,000 goes into 1,000,000 exactly 50 times. So if we assume zero returns on our savings and are able to save this amount of money each year, it would take 50 years to get to the magic million. This is near-enough a person's entire working life! And given how low cash savings rates currently are, you’re unlikely to get there much earlier with a cash ISA.

Luckily, we can expect some kind of return on the money we invest through a stocks and shares ISA, in which case it doesn't have to take this long. And it's here where time can be your best investment friend through the power of something called compounding. This is a mathematical phenomenon that helps your investments grow at a much faster rate by paying a return not just on the money you invest each year but also on the money you've made on those investments in previous years.

Imagine you earn 5% a year (a hypothetical rate) on a £10,000 investment. In your first year, you'd make £500. But in the second year, because you're now starting out with £10,500, your 5% return would make you £525 – and so on. So much so, that by the 20th year of this hypothetical example you'd be earning more than £1,250 and your initial £10,000 investment would have grown to more than £26,000.

Every little helps

There's a catch though – compounding can also work in reverse when it comes to your costs. At the very least, your costs will reduce the amount of positive compounding you can enjoy by taking away from your investment return.

An extra percentage point here and there might not seem like much. But, over time, the more you pay in fees, the less of your return you get to keep for yourself. Those small amounts really add up, and they can make a massive dent in your investment goals.

So if your ISA-aim is to save a million pounds, make sure to keep an eye on your investment bottom-line because some ISA providers charge significantly more than others and not everyone is committed to bringing value to investors.

Take the hypothetical example of Zadie. She works in IT and is fortunate enough to be able to invest the maximum £20,000 each year in her ISA. She has an ISA with Vanguard and – because she’s young with a long investment horizon – she’s fully invested in shares through the Vanguard LifeStrategy 100% Equity Fund. Altogether, her annual fees come to 0.37%2. Under this scenario, and based on our current projections for average long-term stock-market returns of 6%, Zadie would probably hit the million-pound mark in just under 25 years.

Now take Kieran. He’s doing well as a commercial lawyer and is also in the enviable position of being able to invest his maximum ISA allowance of £20,000 a year. However, his ISA provider charges him 1.75% a year. Surely that alone wouldn't make much difference in his quest to become an ISA millionaire, right? Wrong, because it's not until Kieran almost hits his 28th year of investing that he finally gets to join the million-pound-club.

So what may have seemed an insignificant difference in fees ends up adding around three years to the time it takes for him to hit a million pounds. And by the time Kieran does reach a million, Zadie – assuming she continues investing into her low-cost ISA at the same rate – will have earned another £250,000 or so, as the chart below shows.

Compounding costs can drag on returns – an illustration

Source: Vanguard calculations.

We know from history that investment markets don’t move in straight lines and that sometimes they experience sharp falls. But investing is a long-term game – one that Vanguard’s four investment principles are designed to help you succeed at. This includes principle no. 3, which is to control your costs.

As I’ve demonstrated in this article, over the long term your costs can have a significant impact on the success of your investments. The lesson for investors and wannabe-millionaire-savers alike is to control your costs early, or count the cost later.


1 Individual savings account.

2 Includes 0.22% ongoing charges figure (OCF) and 0.15% annual account fee.

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Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

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This article is designed for use by, and is directed only at, persons resident in the UK.

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