I often see it advertised online about investing to become a Stocks and Shares ISA millionaire. It’s a goal for many of us.
But simply putting £20k in an ISA each April and randomly allocating it to stocks isn’t going to guarantee success. Granted, in the world of investing nothing is guaranteed! Yet I believe these five elements will certainly help me to have a better chance of hitting the target.
Don’t overtrade
The tendency can be to be overly active when managing an ISA portfolio. It’s true that I need to pay attention in order to react quickly to events that could cause me to buy or sell a stock. However, I’m not in the business of buying a stock on Monday and selling it on Wednesday for a 1% gain.
Cutting down the amount of trades I book will help my long-term goal of reaching £1m. This is because as the old adage goes “time in the market beats timing the market”.
Keep diversifying over time
Something I’ve been guilty of in the past is investing more and more in the same stock. This can be justified by getting a better average price buying more of the same stock at a lower price. Yet this needs to be balanced against the risk of having too much of one company stock in my ISA.
Rather, over time, my performance will be much smoother if I have a diversified portfolio. This can be achieved by having a range of stocks from different sectors.
Make full use of the ISA provision
I’ll stand a much better chance of hitting £1m eventually if I invest as close to the £20k annual limit as possible. True, this amount is beyond me right now. But the main message is to invest as much as I can in the ISA, so that it can build and compound over time.
A great example of this can be noted when running the numbers. If I invest £5k each year and it grows at a rate of 8%, it’ll take 35 years to hit £1m. If I change this to £10k a year, it shaves off seven years!
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Don’t just rely on growth stocks
Some feel the need to just focus on finding the next Amazon to invest in. Sure, to find an early stage tech company that could grow and offer insane share price returns will help to reach £1m. Yet it feels a bit like an all-or-nothing approach.
Therefore, I’d include growth stocks but supplement this with both income and value stocks. This should help to boost my chances of sustainable growth even if I don’t stumble across the next big thing along the way.
Put out the bucket when it rains
Billionaire investor Warren Buffett famously said that “when it rains gold, put out the bucket, not the thimble”. He meant that when we get a market crash or a black swan event and stocks suddenly fall, a smart investor can make some great opportunistic investments.
Over the course of the coming decades as the ISA is being built, there will likely be at least one market crash. Buying during such a period could help to enhance my returns. This is true if the market eventually retraces higher (as the long-term trend suggests).
