The time it takes to become an ISA millionaire clearly depends to at least some extent on how much is invested per year. Since the annual allowance has been gradually increased over recent years, so that it now stands at £20,000, it may now be an easier goal for some investors.
However, where an ISA is invested may make a much greater difference to the long-term performance of an ISA than many investors realise. Certainly, investing in shares as opposed to other assets such as cash and bonds can lead to higher returns in the long run. But so too can investing in mid-cap shares instead of large-cap stocks.
High return prospects
While many investors choose to focus their portfolios on larger companies, targeting mid-caps can prove to be a worthwhile move. In many cases, they have greater scope to grow. This can mean they’re able to deliver faster share price increases over the long run, having the potential to expand into new territories and move into new markets more easily than their larger peers.
At present, mid-caps may offer even greater return potential than their larger peers. The FTSE 250, for example, generates the majority of its income from companies that operate in the UK. This means there may be wider margins of safety on offer than in the FTSE 100, where the majority of revenue is generated outside of the UK. Since the UK’s political and economic future appears to have caused investors to become somewhat cautious, there may be better-value investment opportunities among mid-cap shares.
The FTSE 250’s historic performance has been significantly better than that of the FTSE 100. In the last decade, for example, mid-caps have posted an annualised total return of over 13%. The FTSE 100’s total annual return over the same time period has been around 9%.
That maybe somewhat surprising to many investors, since the world economy has enjoyed a period of strong growth. By contrast, the UK economy has faltered to some degree in the last few years, with business, investor and consumer confidence seemingly coming under pressure following the EU referendum.
Clearly, the total annual returns of the last decade have been influenced by the global bull market which has lifted equities across the world. In the last 20 years, which includes the financial crisis and dot com bubble, the FTSE 250 has recorded an annualised total return of around 9%. This is perhaps a more realistic guide for future returns in the long run.
Assuming an investor uses up their ISA allowance each year and generates a 9% return per annum, they could become a millionaire within 20 years. Investing £10,000 per year would extend that period to 27 years, while someone who invests £5,000 per year into the FTSE 250 may become a millionaire within 35 years.
As such, becoming an ISA millionaire could be more realistic than many investors realise. By investing in faster-growing shares over the long run, it may be possible to enjoy financial freedom in retirement.
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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.