No investing activity since my last post! I wish to explain the power of compound interest since this is the main purpose of my investments. This is to generate a compound annual growth rate (CAGR) of 10%. Given we all each have a £15,000 allowance for ISA each year, I will be aiming to invest £10,000 at the beginning of each financial year. At the end of year 10, the total amount I will have personally contributed will be £100k. However, due to the eighth wonder of the world (CAGR), I will have achieved a total of £175k, a gain of £75k on top of my £100k contribution. See below for an illustrative example. The best thing of all, the gains will be free from tax (due to the nature of ISA).
The above probably sounds a lot easier than it actually is in reality! This is due to many variables such as the following:
- It gets harder to consistently achieve 10% growth when you have a larger portfolio due to the risk averse approach in later years (i.e. one will not want to take the same level of risk as that in year 1!)
- I may need to withdraw the funds at some point in the next couple of years e.g. to buy a house or to fund a wedding!
- Government may reduce the ISA allowance for shares – as a result, this will have an impact as to how much we can invest tax free.