A new Stocks and Shares ISA year has just started, so we now have a fresh £20,000 ISA allowance.
It’s got me thinking about the secrets of the most successful ISA investors. There are around 2,000 ISA millionaires in the UK. So what do they know that the rest of us don’t?
Well, their secrets are really not too hard to grasp.
The more the merrier
First up, those who can afford to invest more have a better chance of making a million. That much seems obvious. But if we don’t have £20k each year to invest, there’s still a key lesson to learn.
Even just a little more every year can still make a big difference.
Before ISAs, Personal Equity Plans were introduced in 1986. A lot of today’s millionaires started back then, and converted to an ISA in 1999 when those took over.
Long-term gains
That’s 37 years in all. Now, £1,000 per year over that time would mean a total of £37,000 invested. But if we could earn 6% per year on top of that and reinvest any income, it could grow to £131,000. More than a 10th of the way to a million.
Is 6% a year a fair goal? It’s about what the UK stock market has returned over the long term. So remember, every little… erm, can add up to a lot.
Don’t trade
The other key rule of ISA millionaire status is to buy and hold. They don’t try to spot the next quick profit and they don’t trade in and out. That just builds up charges, and even a small drop in our annual return can cost a lot over the years.
Lose just 1% a year in trading costs, and that £131,000 falls to £104,000. Too much trading can bring pain.
So no, the most successful ISA investors buy shares that they want to hold for decades.
Funds and trusts
It’s not all individual stocks though. No, a lot of ISA cash goes into collective investments like funds. And here’s were I see the most striking difference.
In general, a lot of ISA investors go for open-ended managed funds. But, over history, the majority of those have failed to beat the stock market index.
Million pound ISAs, by contrast, have a fair bit more cash in investment trusts instead.
Fund management firms have their owners’ interests at heart. But when we buy investment trust shares, we are the owners.
Equity focus
Many funds bought in ISAs spread their cash across various assets. But investment trusts held by the winners focus mainly on stocks and shares.
Scottish Mortgage Investment Trust is one of the most popular this year, despite a 12-month share price fall. I think that shows how the top ISA investors really are in it for the long term. I guess they see a good future for the US growth stocks it holds.
The secrets
To summarise, millionaire Stocks and Shares ISA investors put as much cash into top quality companies as they can, and hold them for the long term without trading. And they seem to like investment trusts a lot.
That’s not so secret at all, really, is it?
