I recently looked at how the UK’s 1,000 or so ISA millionaires invest their money. In short, they go for a Stocks and Shares ISA, keep very little money in cash, and invest for the long term. I’ve now been having a closer peek at the individual shares ISA millionaires typically buy. And, tellingly, at what they do differently to most ISA investors.
Most ISA investors keep a surprisingly large amount of cash, earning pitiful annual interest. The average ISA millionaire appears to have only around 5% or 6% of their stash in cash. Most ISA investors tend to carry around twice that. Keeping too much cash is clearly a mistake.
All Stocks and Shares ISA investors allocate the biggest slice of their pies to individual shares, and I’m pleased to see that. I’ve looked at the various figures available, and around 50% of the average ISA portfolio is invested this way. The percentage doesn’t seem to vary much between millionaires and the rest of us, which might surprise you. But which shares are the most popular?
When it comes to individual shares, I see little difference. According to Interactive Investor, blue-chip dividend stocks figure strongly across the board. That’s with both ISA millionaires and ISA investors in general. We’re talking of FTSE 100 giants like BP and Shell, GlaxoSmithKline, National Grid, and the like. These are stocks that we like a lot here at The Motley Fool.
ISA millionaires do it differently
When I look at the other 50% or so of the typical Stocks and Shares ISA, I find something that surprises me, and in a good way. You can shelter fund investments in a Stocks and Shares ISA, and that accounts for the bulk of what’s left. But ISA millionaires diverge significantly from those less wealthy.
On average, the split between investment trusts and managed funds (in the form of unit trusts) is about half and half. That’s looking at all ISAs, millionaires or not. Now, I never put money in unit trusts, for one main reason. I don’t like handing over my cash to someone else to manage and charge me for the privilege. Even with honest managers, there’s a conflict of interest. Their motive is to maximise their own company’s profits rather than my nest egg.
Investment trusts
When you buy shares in an investment trust instead, you own the company doing the management. So when the managers try to boost their company profits, that’s your company profits. ISA millionaires know this, and the bulk of their pooled investments goes into investment trusts. There’s very little money in unit trusts in the average millionaire’s ISA.
Which investment trusts do ISA millionaires favour? Going by Interactive Investor again, trusts like Alliance Trust, Scottish Mortgage, and City of London are all popular. All three of those figure in the Association of Investment Companies‘ list of dividend heroes. To qualify, they need to have lifted their annual dividends for at least 20 years in a row. City of London and Alliance Trust have managed that feat for more than 50 straight years.
Emulating ISA millionaires
The lesson for investors is actually quite cheery. On the whole, we’re doing most things right. But we could do better if we ditch cash and managed funds, and instead buy more top investment trusts.