Healthy habits of Isa millionaires
For many of us, becoming a millionaire might seem like a farfetched dream.
But it might not be as difficult as you first thought, provided you adopt the right behaviours.
While the government has regularly ramped up the annual tax-free threshold over the years, in 2017 the allowance saw a massive jump up to £20,000 from £15,240.
The larger Isa allowance has made it easier for people to become millionaires and, unsurprisingly, the number of Isa accounts holding more than a million pounds has been rising.
Figures from FTSE 100 wealth manager Hargreaves Lansdown show that there are currently 168 investors with £1m or more in HL Isas, up from just three in 2012.
Believe it or not, a couple could become Isa millionaires in just over 16 years, according to figures from FundCalibre.
If both of you max out the current individual £20,000 Isa allowance, and assuming the annual capital growth is five per cent after charges, a couple could see their Isa pot reach £993,615 in 16 years.
Using the same assumptions, an individual investing their full Isa allowance could see their investment reach £1,002,269 within 25 years.
There’s no time like the present
Don’t wait to start saving – the longer your investment has to grow, the better.
Also get into the routine of making regular contributions into your Isa – setting up a monthly direct debit can make your life easier. “By drip-feeding your money into the market regularly, you will benefit from a process known as pound cost averaging,” says Maike Currie from Fidelity International.
This means that you stagger your contributions (rather than piling in a lump sum), which stops you from trying to time the market.
“Buying at a variety of prices and spreading ongoing investments over time helps to cushion your portfolio from any dips in the stock market,” Currie adds.
Increasing your savings every time you get a pay rise is also a good habit to get into, says FundCalibre’s Juliet Schooling Latter.
Continuously weigh up your options
Make sure you spend some time researching where best to invest your money, comparing the different assets, funds, providers, and fees.
“The annual rate of return you achieve on your investments after charges will make an enormous difference to how quickly you achieve your goal, so make sure you are getting value for money,” says Schooling Latter.
While you need to be careful not to overpay on charges, bear in mind that cheapest isn’t always best. Some actively managed investment funds will scoop up a much better return than a poor performing passive fund, even once you’ve taken the higher active fees into account.
So make sure you regularly weigh up what you can get for your money.
Have patience and discipline
It’s no coincidence that wealthy people tend to be careful about spending their money, allocating into their savings when possible, and being religious about maximising tax-free allowances.
But it’s also about being disciplined with your investment process, which Sam Lees, head of research at Fund Expert, says is one of the key ingredients to become an Isa millionaire. Having a repeatable process in place can help when it comes to inciting discipline.
In fact, Lees points to what’s known as “momentum investing”, where you buy an asset that has been trending upwards over a certain period of time, and sell those which have been falling. For example, you would buy the investment fund which was the top performer over the past six months, taking into account all sectors. Then you repeat the process in six months, selling the fund you hold, and buying the top performing fund of the most recent six months.
But of course, you need to be disciplined about using this process.
Put your dividends back into the pot
If your investment produces a dividend, reinvest instead of pocketing the cash.
This is the best way to make your money work harder, because your returns benefit from a snowball effect.
“Compounding is the eighth wonder of the world and can make a huge difference to the value of your savings,” says Schooling Latter.
Adopt a sensible strategy
As we’ve already touched on, another key ingredient to pave the way for millionaire status is having a clear strategy in place to maximise your returns.
“Building a million pound Isa portfolio isn’t just about putting your full allowance in and banking on a rising market,” says Sarah Coles, personal finance analyst at Hargreaves Lansdown.
“If you look at the most commonly held funds and shares in millionaire portfolios, they’re not jam-packed with high risk assets,” she says, pointing out that most successful investors take a sensible amount of risk and are committed during the difficult times.
Hargreaves outlines some of the most popular shares in million pound portfolios, which include Aviva, BP, GlaxoSmithKline, Legal & General, Lloyds, National Grid, Rio Tinto, Unilever, and Vodafone.
Of course, just because these stocks are popular now doesn’t mean they will make you money going forward, but again make sure you do your research before you buy.
One strategy to stop you from making emotional decisions, is to have a stop-loss order in place, which automatically sells a stock if it falls below a certain price. You could also consider investing in funds where professional stockpickers make decisions on your behalf – but make sure each fund manager has a different investment strategy.
While there is no sure-fire way to make yourself a millionaire, these tactics will definitely increase your chances.