Five rules to help you become an ISA millionaire

Most investors dream of one day becoming a millionaire. Becoming an ISA millionaire is an even more attractive goal due to the tax-free nature of the ISA wrapper.

In fact, the tax treatment of investments held within an ISA makes it easier to reach millionaire status as there’s no need to pay tax on capital gains and income, taxes which can be incredibly destructive to wealth creation in the long-term.

A million pound ISA balance may seem unattainable at first glance but by following just five simple rules, you can greatly increase your chances of reaching this lofty figure.

Rule one: Save, save, save

Saving money is the first stage to becoming an ISA millionaire. Most people find the concept of saving daunting, and they fail to put in enough effort when it comes to budgeting and ensuring that after living expenses, there’s some money left for a rainy day. It’s vital to devote a small portion of your income every month to savings, even if it’s only £5. What’s more, even when times are hard, it could be best to avoid dipping into your savings. Once you take money out of an ISA from previous years, you can’t put it back. Therefore, any money withdrawn will reduce your long-term tax-free savings allowance.

Rule two: Slow and steady wins the race

Trying to beat the market by jumping in and out of stocks can be a costly endeavour. Studies have shown that even if you manage to pick the best stocks consistently, trading commissions will erode your returns over time. For most investors, better returns are available from a standard index tracker.

Rule three: Don’t lose money

Warren Buffett’s first rule is ‘Don’t lose money’ and the billionaire’s second rule is ‘never forget rule one.’ Every investor should remember this advice. Losses can be hugely detrimental to returns over time. If one of the company’s in your portfolio fails, and you register a total loss, the loss may not seem like much of the time but this loss could cost you tens of thousands of pounds in returns over time due to the effects of compounding.

Rule four: Diversification

You are not Warren Buffett. The average investor needs to have a diversified portfolio of stocks to maximise returns and minimise losses.

Rule five: Don’t rush

Rule number five has a lot in common with rule number two but the key difference is that this rule applies to the investor’s lifestyle, not just stock picks. To be a successful long-term investor, it’s important to invest only what you can afford. History is littered with those who chased wealth at any cost, borrowing to invest and pumping money into so-called investments, which look to offer above-average returns but more often than not turn out to be scams. 

There’s no shortcut, and if something looks too good to be true, it probably is.

The worst mistake you could make

According to a study conducted by financial research firm DALBAR, the average investor realised an annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually.

This underperformance can be traced back to several key mistakes that all investors make, one of which is selling too late. To help you realise and understand the most common mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.

The report is a collection of Foolish wisdom, which should help you avoid needlessly losing too many more profits. Click here to download your copy today.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.