A common aim among investors is to become an ISA millionaire. While it is a challenging prospect, it has generally become much easier in recent years. That’s simply because the ISA allowance has gradually increased. For example, while a decade ago it was £7,000 per annum, today it is £20,000 per year. As such, making a million may now be a more realistic aim for Foolish investors.
Simple strategy
Assuming an investor is able to invest £20,000 into an ISA each year, it is possible to start with nothing and end up with £1m within 23 years. This assumes that the investor is able to generate an annual total return of 7% during the period, which is roughly what can be expected from the UK’s main index.
Clearly, not everyone will be able to allocate £20,000 to an ISA every year. And the return on an investment may be higher or lower than the average of 7%. However, the prospect of becoming an ISA millionaire appears to be open to a significant number of investors in the long run. This means that an ISA could prove to be a realistic alternative to a pension at a time when retirement prospects are uncertain for a large number of people.
Improving performance
Of course, it is possible to generate a higher return than 7% per annum. Since ISAs are mostly invested for the long term, it may be a sound idea to invest in mid-caps and smaller companies alongside larger stocks. That’s because mid and small-caps could offer higher return prospects in the long run, as they generally have higher growth potential than their larger peers. And while they may be more volatile, this would not matter to an investor who is focused on the size of a nest egg 20+ years from now.
Similarly, seeking stocks that offer better value for money or stronger growth prospects than those of the wider index could be another means of speeding-up the process of becoming an ISA millionaire. Value investing has been shown to offer relatively strong performance over the long run, while investing in stocks that pay higher dividends may also be a source of improved returns – especially if dividends are reinvested.
Long-term potential
Clearly, changes to the allowance and tax benefits of an ISA could be ahead. A new government may wish to make alterations in this respect, so there is no guarantee that simply investing a large sum each year in a range of stocks will lead to millionaire status.
However, there is at least the potential for any individual who has spare cash available each year to generate a tax-efficient return which over the long run could add up to a significant sum of money. And for investors who are able to consistently beat the market, the eventual nest egg could be even more impressive.