What better way is there to learn how to become a Stocks and Shares ISA millionaire then from those that have done it already? Luckily, finding the people with million-pound ISA accounts and forcing them to reveal their secrets is not necessary: ISA providers can and do provide a window into their investing world. Research conducted by AJ Bell on ISA millionaires, published in February 2020, revealed the following:
- The average age of an ISA millionaire was 69
- The youngest ISA millionaire was 45
- The average number of investments was 38
- ISA millionaires largely shunned funds with 97% of investments being made in shares, investment trusts and ETFs
- One ISA millionaire made an 8,700% gain on Amazon shares
- Almost half of ISA millionaires owned Lloyds
- FTSE 100 stocks, in general, regularly featured in their portfolios
- They are more likely to have a home bias and stick to UK stocks
One thing to get out of the way immediately is that the report makes no mention of any Cash ISA millionaires. However, these accounts were not explicitly excluded from the study. I will not go as far as to say that none exist, but the report suggests Stocks and Shares ISA millionaires are much more abundant than Cash ones. The fact that the long-term stock returns have significantly outperformed cash also supports this conclusion.
Time to become an ISA millionaire
It would be nice to be a millionaire by the age of 45; however, most ISA millionaires are older. This is not surprising. Assuming a 5% rate of return, and investing £10,000 at the start of each year, it would take 36 years to make a million (see the table below). Decrease the investment to £1,000, but get a 15% annual return, and it takes 35 years to reach £1,141,346.
Source: Authors own calculations; portfolio values assume 5% ongoing returns on annual £10,000 investments
Looking at the table, I can see that between years five and ten, £74k was added. But, between years 25 and 30, the portfolio grew by £196,473. That’s the power of compounding at work, and it gets more powerful as time goes by. Buying dividend-paying stocks and reinvesting the dividends is one way to achieve compounding.
Diverse portfolios of stocks and shares
ISA millionaires do not put all of their eggs in one basket. Instead, they hold around 38 stocks on average in their portfolios. There is consensus that a well-diversified portfolio of around 25-30 stocks offers a cost-effective method of risk reduction. Company-specific risk is the big one that diversification reduces. If an investor puts all their money into one stock, and the company goes bust, they lose everything. Hold ten stocks, and one-tenth is lost, and so on.
However, a 25-30 travel and tourism stock portfolio is not well-diversified. Stock picks should cover a wide range of industries and sectors, to diversify risk at the industry and sector level. Although ISA millionaires exhibit home bias, they are not exposed exclusively to the UK economy. Their tendency to hold FTSE 100 stocks — which tend to have global revenue sources — and investment trusts and ETFs — which could track international indexes or own foreign stocks — gains them diversification across economies.
I think the key takeaway from AJ Bell’s research is that it’s best to start saving as early as possible in a well-diversified portfolio to have the best chance of becoming a Stocks and Shares ISA millionaire.
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James J. McCombie has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.