According to the Financial Times, there are just under 500 so-called ‘ISA Millionaires’ in the UK. The one thing that links all of these investors is age. The average age of the UK ISA millionaire is around 70. This suggests these investors have been squirrelling money away for decades, and patiently waiting for a return.
The other factor that links all of these millionaires is their love of investing. All of them have used the stock market to help them build wealth. Strategies differ from account to account (based on the limited information available), but the one thing they all have in common is a focus on long-term investing in high-quality companies.
Based on the above information, I’ve put together a three-step plan to build a £1m ISA account.
ISA saving
The first step is to start saving. Investors are currently allowed to put away £20,000 a year in a stocks and shares ISA. This is a use-it-or-lose-it allowance. So, it makes sense to use as much of the quota as possible every year — even if you can only afford a couple of hundred pounds.
It’s not possible to build a £1m ISA overnight. It takes time. In fact, with contributions of £20k a year, it would take five decades, excluding any investment gains or losses. That’s why it’s essential to start saving as soon as possible. When you’ve started, you need to stick to the savings plan over the long term.
Trust the market
The next step is to invest your money. Over the long run, the FTSE 250 has returned around 10% per annum. At this rate of return, it would take just 18 years to build a £1m ISA account. That’s assuming an investor used up the full £20,000 ISA allowance every year.
It would be impossible to achieve the same kind of return with cash interest rates where they are today. The best flexible Cash ISA interest rate on the market today is just 1.3%. At this rate of return, it would take nearly four decades to build a £1m ISA account with annual top-ups of £20k.
Quality over quantity
The third and final step is to seek quality over quantity. One thing that links all successful long-term investors is a focus on high-quality stocks. This primarily means targeting companies that have a definite competitive advantage and a loyal customer base.
These are the kind of businesses investors can buy and forget, safe in the knowledge that they should generate attractive returns over the long run.
Successful long-term investors also avoid trading in and out of positions quickly. They tend to pick a few key companies and stick with them, rather than owning a broad range of businesses. The more investments you make, the higher the chances are that something will go wrong.
Buying a low-cost FTSE 250 or FTSE 100 tracker fund could be an excellent alternative for investors who don’t have enough time to find these sort of companies.