When people ask me how to build a £1m ISA, I tell them the truth. It’s really not that hard. With a long enough road and dedicated investing principles, it’s perfectly possible.
Adding extra money into your Stocks and Shares ISA every month is like putting a jet engine under your capital. But chucking a lump sum into a savings account or a Cash ISA? That’s like wandering down a runway flapping your arms and expecting to fly.
You have an unprecedented opportunity in front of you right now. Asset prices have taken a huge beating in this stock market crash. And so it’s likely you’ll make the biggest investing gains of your life from the best buys you make now.
These are my three tips to make yourself an ISA millionaire.
1: Stay the course
Most people don’t become ISA millionaires because they can’t stick it out. They get itchy trigger fingers. They invest more than they can truly afford, and end up needing to dip into their ISA to pay bills.
However, if you get the basics right, compound gains are what really get your money motoring. I’m talking of course about buying shares in strong FTSE 100 and FTSE 250 companies. Reinvest the dividends to grow your portfolio instead of taking those payouts as income.
I’ve picked up FTSE 100 bargains in hefty dividend payers like Royal Dutch Shell, Legal & General, and GlaxoSmithKline. These are the ones that will pay me back many times over the next two decades.
2: Buy undervalued
Good companies can trade at low prices when the market is in turmoil. Investors can profit from this situation by identifying quality businesses that will recover most strongly when life returns to normal.
The epic global threat of the coronavirus has hammered even the best share prices, and we face an uncertain short-term future. But even the most pessimistic predictions see stock markets back on track within three to five years.
Investors who put money into the market in the depths of the last financial crisis would be sitting on a pretty penny today.
And even if we have to live through a bear market for a while, the most likely outcome is that share prices will recover. It happened after the dotcom bubble burst in 2000. It happened after the credit crisis of 2007–09. No one can tell the future, but history tells us it is very likely to happen again.
3: Keep it regular
There’s a simple principle I use called pound-cost averaging. Like most financial jargon it might sound complicated but it is easy, and anyone can do it.
I’m lucky to be paid decently well in my chosen career as a financial journalist and copywriter. I put a proportion of my monthly income into my Stocks and Shares ISA every month. When my available funds hit a certain level, I buy into my favourite long-term shares.
Because I’m investing regularly, I’m paying less when the market is down, even if I pay more when the market is up.
At an annual return rate of 7%, over 20 years, you can start with nothing, nada, zip, but invest the maximum £20,000 a year into a Stocks and Shares ISA, and still come out the other side with more than a million quid.
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Tom Rodgers owns shares in Royal Dutch Shell, Legal & General and GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.