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We can invest up to £20,000 in a Stocks and Shares ISA every year.
A million would be 50 years worth of ISA allowances. And even with £20k each year, who’d want to wait that long?
Well, there were around 4,000 ISA millionaires at the last count, and they hit the target a good bit quicker than that.
Biggest ISA pots
The most successful started out with Personal Equity Plans (PEPs), and moved to ISAs in 1999.
So they’ve still been going a long time. But the biggest ISA pots today are way bigger than just the modest million pounds we’re talking about here. The top 25 ISAs average around a whopping £11m each. And that’s just the average, so the top one will be more than that.
What are the secrets of these ISA millionaires, that anyone starting today could try to follow? First is to use up as much of the annual allowance as we can… but it doesn’t need a genius to work that one out.
The right stocks
What really counts is picking stocks that can compound up our returns over the decades. The average Stocks and Shares ISA returns hit 9.6% annually for the past decade. To see how something like that might build up, I’ll use investment manager M&G (LSE: MNG) as an example.
It’s on a forecast dividend yield of 9.9% now, which is a bit above that ISA average. But it’s the closest I can find in the FTSE 100… and why not be a bit more ambitious?
M&G’s share price has been through a rough time, down 11% in the past five years. Demerging from Prudential just before the Covid pandemic might not have been the best timing in the world.
I’m not saying I actually expect M&G to consistently pay 9.9% each year. In fact, I think it could be one of the FTSE 100’s most volatile in the long term. But I’m just using its dividends as an example.
Compound returns
To target the best returns, we’d need to buy more shares with the dividend cash each year. That would help get the most from the miracle of compound returns.
Investing the full allowance each year, we could reach over a million in 19 years — £1.07m, in fact.
At that ISA average of 9.6%, it’s about the same time, netting around £1.03m.
And at the long-term UK stock market average total return of about 7%, we’d need to keep going for 22 years. So someone starting today at the age of 40 could do it before State Pension age.
Now, there’s no guarantee of any of this. And investing in shares means we have to accept some risk. But the UK stock market has been making people rich for a very long time.
The secrets
So what’s the big millionaire ISA stock-picking secret again? It’s really just to go for high-quality, cash-generative businesses and hold them for the long term. ISA millionaires don’t trade in and out of get-rich-quick stocks, and don’t waste money in fees by trading too much.
