The truth behind ISA millionaires – its easier than you think

How you could have already become an ISA millionaire without being a stock picking genius…

Investing is easy. As my new motto goes (see this article on investing your ISA allowance for an explanation), all we need to do is “max, trax and relax”.

The numbers below show us why this is so powerful. All you need to do is maximize your annual ISA contribution, invest the ISA balances into a UK FTSE 250 fund and then sit on our backsides for 25 years: the lazy man’s recipe for investing success.

For more details and tips on becoming a stock market millionaire, check out this great post my Money Smart Guides.

 

What the media is saying

As we approach the ISA year-end, there are many sites out there offering ISA advice. What I have also come across is a series of articles which have highlighted the ISA millionaires and their *secrets*:

The Guardian: He’s made £1m from investment Isas – and, he says, you can too

The Telegraph: Lord Lee: How I became Britain’s first Isa millionaire

This is Money: How to become an ISA millionaire in less than 30 years

City AM: How ISA millionaires make it in five steps

These articles, whilst interesting, seem to include some themes which I find somewhat bizarre.

Lord Lee, whilst coincidentally pushing his book, suggests that picking “genuine quality smaller-company UK shares” is the way for success. Whilst this is can lead to success, it equally can lead to failure. To be able to pick these “winners” most people select a whole lot of losers as well and this destroys their long-term returns. Equally, picking these individual stocks in the ISA will lead to two other major problems:

    1. You will be poorly diversified
    2. You need to spend a lot of time researching these companies. This has a cost per hour attached to it which could maybe be spent more productively elsewhere.

The “how to become an ISA millionaire” article shows how over the next 27 years, you could become an ISA millionaire. There are a couple of problems here.

    1. Firstly, a millionaire in 27 years’ time, due to inflation, won’t mean that much. Assuming annual increases in house prices of 5% per annum (the long term average is nearer 7-8%), the average house in the UK in 27 years’ time will cost £933,364 (based on today’s prices).
    2. As we will show below, just by simply investing in UK equity markets, it would have only taken 26 years to accumulate almost £1.5m in today’s money. Therefore, the article isn’t showing anything new.

Finally, the City AM article suggests that one of the 5 key steps to becoming an ISA millionaire is “don’t be afraid to take risks”. In this context, having an overly active risk-appetite is almost certainly a bad thing for your long-term investment. Investing in young oil stocks, gold mines, etc is not a sure way to investing success (quite the opposite in fact).

 

The history of ISA contributions

ISAs (or their equivalent predecessor – PEPs) have been around since the start of 1987. We have taken the history of the maximum amount allowed from the isaco website:

ISA millionaire 1

The total of these contributions is £217,660 – not even close to being an ISA millionaire. However, if we invested the maximum contributions into the UK stock market, without removing any profits, we would see a very different outcome.

Invest in FTSE 250

Since 1987, FTSE 250 historical data can be found on Yahoo! Finance UK.

In short, the FTSE 250 has returned, on average 8.6% per annum since this date (until 31 Dec 2013). However, this does not account for dividends.

Using information from SwanlowPark, we can determine that the average annual dividend yield for the FTSE 100 since 2003 (data recorded) is 3.9%. Equally, the average annual dividend yield for the FTSE All-Share since 1986 (data recorded) is 4.0%.

Therefore, we can safely assume an average dividend return from the FTSE 250 of 4% per annum.

 

Would the FTSE 250 make me an ISA millionaire?

Yes, it would.

All we need to do is place the full allowance into the FTSE 250 at the first possible date and then reinvest all dividends.

Following this VERY simple strategy, in December 2013, we would have a total of £1,477,666.

It doesn’t take stock picking. It doesn’t take hours sifting through company accounts and working out specific margins and ratios. We don’t need to analyse the competence of the CEO. We don’t need to worry if they companies sufficiently make use of their capital.

All we need to do is…

ISA millionaire 2

 

Update from the 2014 budget

Big changes have just been announced in the 2014 budget. They can be summarized as:

  1. The overall ISA limit is to rise to £15,000 from July from £11,520
  2. All of the new £15,000 allowance can be held in either cash or shares
  3. Savers can transfer funds freely between existing cash ISAs and shares ISAs

3 thoughts on “The truth behind ISA millionaires – its easier than you think

  1. I’m not going to lie, I had to look up what ISA was, as that’s not a common term here in the US. Once I understood, it started to make a little more sense. Regardless of the terminology, time is definitely the biggest tool that many people have at their disposal when it comes to accumulating wealth. The earlier you start investing and saving, the better chance you will have at building significant wealth down the road.
    Money Beagle recently posted…Avoiding the Hassles of Out of State Job SearchesMy Profile

  2. It’s a shame how few can follow such simple advice. It’s the same story here in the US. If you just invest the max into the S&P 500 and forget about it, you are going to be a millionaire. But no one wants to wait 20 years. They want to be rich tomorrow so they keep buying and selling trying to find that one investment that will grow to a million overnight.
    Jon @ Money Smart Guides recently posted…The Ultimate Guide To Retiring EarlyMy Profile

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