Building a million pound nest egg may seem like an impossible goal for most of us. But since the accounts launched in 1999, thousands of savers have used shares and Isas shares to invest their way to the £1 million mark.
Far from a sprint, it’s an exercise in getting rich slowly. Consistently paying into your pot and investing smartly are the keys.
So how did the millionaires do it? And where are they investing now?
Could you become an Isa millionaire? Experts say the secret is to be consistent
Of course, every investor is different. Some play it safer than others.
But there are surprisingly strong trends that those with bigger investment pots often follow, setting them apart from mere mortals.
They greatly prefer investing in the stock market to keeping the money in cash. ISA millionaires keep an average of only 5.2 pc. of their money in cash, while tending to reinvest their profits and dividends on a regular basis. This is according to data from stock broker Interactive Investor.
Other investors, on average, have twice as much of their savings in cash.
It will probably take you much longer to get £1 million if you leave your money in cash. This is because, even though interest rates are rising, long-term returns on stocks tend to beat interest rates on cash.
Mutual funds, publicly traded companies that take your money and invest it for you, are the investment of choice for millionaire investors. This type of investment differs from a regular ‘fund’ because, as they are stand-alone companies, their managers have more flexibility in how they invest.
Mutual funds make 42 pc. from the wallets of Isa millionaires. By comparison, the average investor puts less than a quarter of their money into mutual funds.
Other investors tend to spread their money more evenly between mutual funds (24 pc of their portfolios) and regular funds (22 pc). The latter are simply pools of money collected from thousands of investors that are then managed by a dedicated fund manager, who picks stocks for them.
Dzmitry Lipski, head of fund research at Interactive Investor, warns that while mutual funds can generate higher returns because they have access to extra leverage that traditional funds don’t — such as being able to borrow money — they can also fare worse in tough times.
“The bells and whistles of mutual funds mean they can also underperform in a falling market – and because they are publicly traded, trusts can also be affected by overall market sentiment,” he says.
Oil giant Shell is the most popular stock of Isa millionaires, according to data from broker Hargreaves Lansdown. Next is pharmaceutical company GSK and High Street bank Lloyds Banking Group.
Shell’s share price is up 8.9 percent over the past 12 months, even after falling more than 10 percent in the past month. The recent dip is largely due to increased turbulence in the stock market, as banking problems in Switzerland and the US eroded investor confidence.
GSK shares lost 15 percent last year. in value, while the price of Lloyds shares remained stable, only by 0.5 pc.
Stocks most frequently appearing in their portfolios also include insurance and asset management giant Legal & General Group and oil and gas company BP.
All of these stocks have one thing in common: they typically pay high dividends.
When it comes to funds, the Lindsell Train Global Equity emerges as a favorite. By investing in the shares of companies around the world, it achieved a return of 4.4 pc last year. and 47.9 pc over the past five years.
In December, Lindsell Train admitted it had endured “two years of underperformance” as investors pulled their money out of the funds and markets crashed.
Fundsmith Equity is the second most sought after fund according to Hargreaves Lansdown. The global fund gained 2.8 pc over the past 12 months. and 77.1 pc in the past five years.
Other millionaire favorites include the Artemis Income fund and Fidelity Special Situations, which invest primarily in UK-listed companies; and the BNY Mellon Global Income, which invests globally.
You don’t need to invest in niche or obscure industries to become an Isa millionaire. It’s all about investing as much as possible, as regularly as possible
Alice Haine, Bestinvest
Seasoned investors in the £1 million club also differ from others in terms of when they choose to upgrade their Isas.
At the start of the 2022 tax year, between April 6 and April 30, they typically funnel almost all of their £20,000 annual allowance to Isas.
That is double the amount that the average saver pays during that time, according to Interactive Investor.
Investing early pays off because it gives your money more of a chance to grow and boosts your portfolio when the markets rise.
It would take 24 years to reach the £1 million mark if you paid the full £20,000 each year to an Isa and had an annual return of 6 pc. after deducting costs.
If your smart investment led to an annual return of 8%, it would speed up the process by three years.
The good news is that those who can put down just half that amount of £10,000 a year won’t have to wait twice as long. According to Laith Khalaf of stockbroker AJ Bell, it would take 33 years to set aside that much each year at a 6 percent return.
Alice Haine, from broker Bestinvest, says it is mandatory for Isa millionaires to invest over a very long period of time, even in difficult times.
“Ultimately, you don’t have to invest in niche or obscure industries to become an Isa millionaire or have a secret winning formula,” she says.
‘It’s about investing as much as possible and as regularly as possible.’
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