Just invest the full Stocks and Shares ISA allowance of £20,000 per year, and earn a steady annual tax-free return of 6% (remembering to reinvest all income). Do that, and we’d have a million in about 24 years. Easy, right?
Well, not many of us have £20,000 to invest every year, so that’s one slight hurdle to overcome.
And getting a guaranteed 6% per year, every year, from UK stocks and shares? In reality, returns will be up and down. There’s risk involved in buying shares, and we’d surely make a loss some years.
Cash ISA?
A Cash ISA is less risky. And right now, some are offering around 4% per year. That could get us to the magic million in 28 years.
So bung all our spare money in a Cash ISA and wait a few decades? Unfortunately, that 4% is only for fixed one-year deals. And when Bank of England rates fall, they won’t be able to offer as much.
I suspect it won’t be long until we’re back to around 1% from a Cash ISA. And I really don’t see that as the stuff that millionaire dreams are made of.
ISA millionaires
In the UK there are now more than 2,000 ISA millionaires. I think that’s stunning. And the biggest ISA pot is somewhere around £6m. So what can we learn from them?
First, they all use Stocks and Shares ISAs. Nobody has yet hit the millionaire headlines with a Cash ISA.
Meanwhile, Stocks and Shares ISA returns over the past 10 years have averaged a whopping 9.6% per year. Take that, one-year Cash ISA and your measly 4%!
That would be enough to make a million in just 19 years, assuming we achieve it every year and invest the full £20k.
Real life
Now, I really don’t expect ISAs to continue to generate 9.6% per year every year. But it does make my 6% target look a lot more realistic, doesn’t it?
And even if we can’t use our full ISA allowance, we can still learn from the millionaires and maximise our own life-long ISA pots. So what’s their secret?
We might expect the most successful ISA investors to be champion stock pickers, chalking up the multi-baggers year after year. But we’d be wrong.
Buy quality
No, the best investors just buy top-quality blue-chip stocks, and keep them for decades. There’s no chopping and changing, or short-term trading, as that quickly escalates costs.
According to ISA providers AJ Bell and Hargreaves Lansdown, the most popular stocks among ISA millionaires include Lloyds Banking Group, Aviva, Legal & General… lowly-valued high-dividend picks. Shell, National Grid, GSK… most of the long-term FTSE 100 favourites are there.
The millionaires favour investment trusts too, including Alliance Trust and Scottish Mortgage Investment Trust. Just those two together provide a diversified selection of income and growth stocks.
The secret is out
So the secret of the ISA millionaires is out. And it turns out to be not so secret after all. Just invest as much as we can in top-quality shares, and keep them for as long as possible. I can get my head around that.
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