Isa millionaires: the fortune formula

What are the strategies and holdings used by Isa millionaires to enable them to hit the magic number?

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The individual savings account turned 20 years old this year. First introduced in 1999 by the then chancellor Gordon Brown to replace the share-focused Pep (personal equity plan) and cash Tessa (tax-exempt special savings account), the Isa has proved an invaluable tax wrapper for UK investors and savers.

Investors are able to save and invest in the Isa wrapper indefinitely without having to worry about paying capital gains or income tax on their returns.

Over time, the amount that can be placed into an Isa account each year has gradually increased. Isas started life with a £7,000 allowance for stocks and shares, which rose to £10,000 in 2010. The latest uplift was in April 2017, giving investors a new £20,000 per year allowance.

Both the tax efficiency of Isas and the willingness (so far) of governments to maintain or increase the allowance have made the tax wrapper a staple of UK personal financial planning. The past 20 years of their existence have also created a new phenomenon: the Isa millionaire.

Defined as someone with over £1 million in either investments or cash in their Isa accounts, Isa millionaires are believed to number roughly 1,000 at present. By not having to pay tax on their investments in their Isas, these millionaires have been able to reach that exalted position much more quickly than a non-Isa investor.

Typical asset allocation of an Isa millionaire

Direct equities: 59%
Investment trusts: 23%
Unit trusts: 7%
Cash: 7%
ETFs: 3%
Bonds: 1%

How easy it is to become an Isa millionaire?

There are two key variables that will determine how quickly you could become an Isa millionaire: the amount you can invest and the growth of the holdings once invested.

Ben Yearsley, director of Shore Financial Planning, provides some statistics. Were you to start now, contributing the current full annual £20,000 allowance (assuming it stays the same), and your investments saw 5% annual growth, it would take 25 years to reach £1 million – or £1,002,269 to be exact.

However, were you to experience slightly higher returns – 7%, say – you could trim three years off that period, achieving a total of £1,048,722 after 22 years.

But how realistic are these figures? First, when it comes to the amount saved per year, the numbers used above are far from mainstream. The total investment needed to reach millionaire status over 25 years, assuming modest 5% return expectations, is £500,000. That would require an annual contribution of £20,000 for each of those years.

But this is not a realistic annual savings figures for most people in the UK to save per year.

Indeed, the latest figures show that the average amount saved in all adult Isa in the financial tax year 2017/18 was roughly £6,400 – less than a third of the full allowance.

Saving at that rate significantly increases the time needed to become an Isa millionaire: at an annual return of 5% it would take 44 years, and with 7% annual returns, 36 years.

On top of that, there is no guarantee that the Isa contribution figure will stay the same. Over the years, the allowance has gradually gone up. That may continue; or, in a bid to claw back lost revenue, a future government could reduce the annual allowance. That would further increase the time taken to gain Isa millionaire status.

The most important factor in achieving that goal appears to be making the maximum savings contribution possible.

As Darius McDermott, managing director of Chelsea Financial Services, notes: “Save as much as you can afford. There are always demands on our hard-earned cash. Whether it is increased bills, holidays or a new car, there are often either more pressing things or more exciting things to spend our money on. A good habit to get into is to increase your savings by the same amount as any pay rise as soon as you get it. What you haven’t had previously, you won’t miss.”

How long it could take to become an Isa millionaire

A bar chart to show how long it could take to become an Isa millionaire


No certainty in growth projections

But how certain are the growth figures? It is impossible to know for certain what returns the future holds. But we do have history as our guide.

According to Yearsley, over the last 30 years the FTSE All-Share has provided an annualised 8.2% return. “This would have turned £1,000 into £10,636 over 30 years. So somewhere in the 5-7% range is a fair long-term estimate.”

He adds: “If you add dividend yield of 4% to 2% inflation, that gives you 6% total return – equities over the long term should keep pace with inflation.”

Of course returns can vary widely in different markets. In contrast to the UK, the US market has seen an annualised return of around 12% over the past decade. However, in the upcoming decade, fund provider Vanguard forecasts that US markets will provide just 4-5% annual returns.

Meanwhile Lars Kroijer in his book Investing Demystified says investors can reasonably expect similar (4-5%) long-term returns from the world stockmarket index.

These figures are based on the real returns average from world equities between 1900 and 2015.

Based on this, Kroijer says: “Equity investors have in the past demanded a 4-5% premium for the risks that equity markets entail, and I think there is a good probability that investors in the future are going to demand a similar kind of return.”

Investors will also have to make a decision on their asset allocation across markets. Kroijer’s advice is simply to go for the global market. Some investors, however, may believe certain regions offer better returns.

What do current Isa millionaires do?

One option is to increase exposure to fast-growing emerging markets at the expense of the developed markets, for instance. However, this also increases risk. Making such calls about the future is tricky and they can often turn out to be wrong. It makes sense to keep your portfolio reasonably broadly diversified across markets.

The above growth figures are based on market index returns. However, according to data from interactive investor, our parent company, the average portfolio for Isa millionaires has just 3% in exchange traded funds that track such indices (index funds are classified as unit trusts).

As passive investment strategies grow in popularity, that may increase. Currently, however, the most popular way to invest for Isa millionaires is via individual shares. These have rewarded some investors with substantially higher returns.

Indeed, without the potentially higher returns of individual share investments, many Isa millionaires would likely not have hit the mark.

As Rebecca O’Keeffe, head of investment at interactive investor, Money Observer’s parent company, points out, if you’d invested the maximum amount available at the time in an Isa over the past 20 years, you’d have a pot of £206,000 in cash (remember, the allowance has increased over those 20 years and was not always today’s £20,000 figure). For that money to reach the million mark within 20 years, you’d need an annual rate of return of 15.5% – far greater than market index averages, either past or what may be expected in the future.

So, should Isa investors forget the 5% annual return and go all out for individual equities? Achieving a 15% growth rate would significantly reduce the amount of time (and level of contributions) needed to reach millionaire status.

The trouble, however, is that getting your stock choice right is notoriously hard, while getting it wrong is potentially disastrous. Academic studies show that even for the most seasoned and professional stockpickers, an element of luck (just how much is disputed) is involved in generating returns. Anyone trying their own hand should know that the odds are against them.

Also, it should be kept in mind that any Isa millionaire figures are going to feature an element of survivorship bias. Put another way, while the majority of Isa millionaires invest in individual shares, the figures give no sense of how many potential Isa millionaires failed to reach their goal on the back of bad stock picks.

It takes a lot of time to get stock selection right

Another downside to trying to run a portfolio of individual equities is the seeming amount of time and dedication it takes. If we accept the premise that skill outweighs luck in stockpicking, developing the skills to identify the correct companies takes a considerable amount of practice.

At the same time, running a portfolio involves regular updates. According to figures from interactive investor, the average number of trades made by Isa millionaires is 46 per year. That means a significant ongoing level of engagement and adjustment.

As Moira O’Neill, head of personal finance at interactive investor, summarises: “[Stock investing] takes a considerable amount of time and dedication.”

Alternatively, investors on a mission to become Isa millionaires could consider pooled investment vehicles in the form of investment funds or trusts. Taken together, they constitute roughly 30% of the average Isa millionaire portfolio.

Funds and trusts are something of a half-way house between opting for the index or picking your own shares. In their similarity to individual equity picking, they offer the potential of market-beating returns through their more concentrated portfolios. That could make a big difference in the length of time or total sum needed to reach Isa millionaire status.

Darius McDermott gives an example: “If you had invested a much smaller sum of money – £10,000 a year for 20 years – in Marlborough Special Situations fund, which has been run by the same manager for two decades, you could have achieved the desired result and have a pot of money today worth in excess of £1,240,000.”

The difference a strongly performing fund in your portfolio makes can be seen by looking at the most popular investment funds and trusts among Isa millionaires, using interactive investor data.

As the table below shows, the most popular investment trust was Scottish Mortgage. Over the past five years alone, the trust has provided a return of 157.5%. Meanwhile, Fundsmith Equity was the most popular investment fund, with five-year returns of 152.5%.

Of course, picking one of these winning funds is easier said than done. First, you won’t know in advance which fund will provide the best performance. Just as with equities, you could get it wrong. The plus side, however, is that if you do buy a dud, the potential “downside” – that is the amount you stand to lose – is generally lower, as funds and trusts offer greater diversification.

McDermott emphasises: “Do your research. Do spend time researching the best fund managers.”

However, even with the most in-depth research, investors still face the possibility of buying into a fund that persistently underperforms. That could seriously increase the time needed to reach Isa millionaire status.

Most popular investments held by interactive investor Isa millionaires

Equities Investment trusts 10-year performance* Funds 10-year performance
Royal Dutch Shell Scottish Mortgage 588% Fundsmith Equity 358%
Glaxosmithkline Primary Health Properties 304% First State Stewart Asia Pacific Leaders 111%
Lloyds HICL Infrastructure 151% Janus Henderson European Select Opps 120%
Aviva Worldwide Healthcare Trust 484% Baillie Gifford Global Discovery 306%
Legal & General Templeton Emerging Markets 130% Investec UK Smaller Companies 179%

Notes: *Current holdings of interactive investor Isa millionaire customers, based on number of customers and not on size of individual holdings, as at 20 February 2019

Risk tolerance

Choosing the best fund strategy and asset allocation for an Isa millionaire portfolio comes down to your risk tolerance and expected time in the market.

According to Yearsley: “The longer you can remain invested, the greater the tolerance for risk in my view.”

Yearsley defines ‘long-term investors’ as those expecting to be in the market for 10 years or more. Those doing so, he argues, should “look to the higher-risk, more volatile sectors and regions – emerging markets, Asia and smaller companies.” These regions, he says, have the “best long-term growth potential and may mean the amount you have to invest and the time to get to millionaire status is reduced.”

Bond or property funds should be avoided, he says. “You are looking for the highest long-term growth possible.” Bonds and property can’t provide this.

However, he suggests some alternative assets worth including: “You need some balance in your portfolio, so add something like infrastructure, which is an excellent long-term theme, or healthcare – both fascinating and driven by demographics, but not as risky as some of the other areas.”

Case study: the world-travelling investor

One astute saver who has claimed Isa millionaire status is Richard Parry, a retired pilot from Hereford.

It should come as no surprise that central to this achievement has been Parry’s willingness and ability to contribute the full amount every year into his Isa.

He says: “Although I’m not earning anymore, I still invest the maximum allowance. I’ve always invested the maximum amount.”

When it comes to the type of investments, Parry sticks to equity funds only, holding 35 in total.

However, Parry’s method of choosing funds is relatively unconventional. Alongside reading the investment press, Parry often becomes interested in a fund based on his personal experience of visiting particular countries.

For instance, impressed by the economic progress that he has witnessed in India, Parry’s portfolio now consists of around 10% in Indian equity funds.

Funds that invest in Vietnam and Norway, two countries that also impressed him, are similarly in his portfolio.

Alongside single-country funds, Parry also holds a thematic fund focused on healthcare: “We are all getting older. It seems a very good earner,” he says.

Once a fund has caught Parry’s interest, either through because it offers exposure to a desired country or by being flagged up in the press, he further researches the fund, often with an eye on the manager and their track record.

“I make sure to look at fund managers. The only time this has gone wrong was with Anthony Bolton,” he says.

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ISA investments

They seem to be great investment vehicles within reach of most people .

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