One Way to Become an ISA Millionaire

Tuesday, Jan 07 2014 by
77

Despite their popularity, long history and the potential offered for compounding returns tax-efficiently it is surprising that according to anecdotal evidence there are only around 100 ISA millionaires in the UK out of a total of 24.3 million people who hold ISAs.

A staggering £442.8 billion was held in Cash and Stocks and Shares ISAs at September 2013 with the average value of a Stocks and Shares ISA worth £25.9k in April 2011 (all data from HMRC Individual Savings Account (ISA) Statistics, September 20131).

It seems odd that this hugely successful scheme to encourage savings and investments should have been the subject of a debate by policy wonks at the Treasury on placing a cap on the value of an individual ISA, in a manner similar to the lifetime allowance in an approved pension scheme. This might have been prompted by concerns over a few investors doing very well but given the estimated annual tax cost to the Exchequer of ISAs in 2012-13 was just £1¾ billion1,2, or 0.4% of the value of total assets held, the average tax cost per ISA holder to the Exchequer is just £71.85 per annum.

A better discussion might have been had around how to encourage the public to become more astute in their savings and investment decisions, even more relevant now following the banning of commissions for the provision of financial advice to retail customers at the end of 2012. This should start by explaining why Stocks and Shares ISAs generally perform better than Cash ISAs. The average Cash only ISA was worth just £7.35k in 2011 despite securing nearly 70% of investors’ annual contributions. Lower contribution limits, low interest rates and regular withdrawals are all to be blamed. The power of compounding is not being given a chance to work.

In a Stocks and Shares ISA, particularly a self-directed one, compounding has greater scope to produce its magic. Someone making the maximum contribution each year to a Stocks and Shares ISA since the savings wrapper was launched in 1987 (initially as a Personal Equity Plan or PEP which were merged with ISAs in 2008) could have amassed tax-free savings worth around £649,325 had he or she only matched the performance of the FTSE 100 (on a total returns basis), around 7.66% p.a. A married couple making the maximum contribution and achieving the same annual return would be worth £1,298,6493. The…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. The author may own shares in any companies discussed, all opinions are his/her own & are general/impersonal. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested.


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29 Comments on this Article show/hide all

johnrosier 8th Jan '14 10 of 29
3

In reply to post #80358

I use both investment trusts and ETFs for overseas but prefer Investment trusts as I reckon with a bit of research you can usually find a good manager who can outperform his/her respective Index. currently hold Baillie Gifford Japan and Baillie Gifford Shin Nippon. Have held Templeton Emerging Markets, Schroder Japan, BlackRock Latin American, Aberdeen Asian Smaller Companies and F&C US Smaller Companies in the last couple of years.

I also like Investment trusts for themes where you need real expertise; currently own Biotech Growth Trust and WorldwideHealtcare Trust

Website: JohnsInvestmentChronicle
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Boros10 8th Jan '14 11 of 29
5

Thanks you for all the positive feedback.

sharroncostley. My QARP approach evolved over time and is very influenced by Warren Buffett and the likes of Joel Greenblatt (The Magic Formula), Professor Novy Marx, Howard Marks (Oaktree Capital), Nick Train (Lindsell Train) and Antony Cross (Liontrust). Fundsmith, launched by Terry Smith, in 2010 adopts a very similar approach but with a greater focus on big cap and overseas stocks. My wider portfolio is just over 31% in QARP stocks - I find it is increasingly difficult to find the R bit! I don't currently own any collective funds - past experience has not been good - but if I did not have the time to do my own thing I would happily invest in any fund run by one of the above. I also rate Gervais Williams at Miton but his style is slightly different to mine. I accept that owning funds can give you exposure to markets which it might be hard to access (e.g. Russia or a specialist Biotech fund) but I think it is best to invest in what you know (and can best monitor) even if you end up being overweight UK plc.

I agree with your comments about pensions. It might sound a bit arrogant but if I can't get my head around all the rules & regulations what chance has the average man or women in the street?

peterg. I suspect you are correct when you say there are likely to be more than 100 ISA millionaires. I based my figure on various articles I have read but there are a host of reasons why this might understate the actual total. Even if the true figure is 500 or a 1,000 it is still on the low side given the number of ISAs in issue and the maturity of the scheme.

intuitive6191. Given the state of public finances in the UK with the annual deficit at around 30% of expenditure (the average has been around 20% since 1962!) I suspect you are correct when you suggest  the taxation of ISAs will change for the worse at some point.

jjis. I agree, if a limit of £100k were placed on the value of stocks/cash that could be held in an ISA  - the last thing I would do is invest the balance in an annuity.

I was trying to draw a contrast between the small number of people with substantial ISAs and the large  number of public sector employees in final salary schemes with very large pension pots. 

 

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jjis 8th Jan '14 12 of 29
1

In reply to post #80358

I also use Investment Trusts & ETF's for overseas exposure but with an emphasis on income, see my post here today for an example.

Alternatively there are some good cheap international Global Growth Trusts which can be a one stop shop such as Scottish Mortgage Investment Trust (LON:SMT) (Baillie Gifford, growth manager, good record but close to NAV) and Alliance Trust Closed Fund (LON:ATST) (Self Managed, cheap, slightly stodgy performance but comes at a discount of around 11% to NAV. Good luck with your investing.

 

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extrader 8th Jan '14 13 of 29
1

Hi Boros10,

Many thanks for sharing your investment history and insights.

I was particularly impressed in your actually 'cashing out' in 2008 - a flexibility that all PI's have but is rarely exploited - and wonder (faced as we are with not dissimilar uncertainties) - what your current thoughts on appropriate cash levels are ?

ATB

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Katewarren 8th Jan '14 14 of 29
10

Many thanks for the article and for sharing facts and knowledge......( not just opinions). Good food for thought. Here's a little ditty I wrote about the ISA millionaire possibility!

Would you like to win the lottery
And receive a load of cash ?
Oh no, not me, too random
And perhaps a little brash.

I prefer investing
In British companies,
And you see
Profits and potential losses,
Are attributable to me.

But I never really had
A proper strategy,
Now with the tools of Stockopedia
I've learned that
Strategy, is key.

I've honed my skills at Stockopedia
And my returns are getting higher,
And running the screens and stock reports
Of this I'll never tire.

And now I've got a mission
That's acheivable 'cos you see
An ISA millionaire
Is what I aim to be.

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wjjward 9th Jan '14 15 of 29

Fabulous article and a real inspiration. Agree with everything written.
Rgds,
Bill Ward

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cig 9th Jan '14 16 of 29
4

Lots of good advice but beware of survivorship bias. Such success stories often involve successful market timing and concentrated small cap portfolios, which are strategies that naturally produce outliers and are not easily emulated, and we don't hear as often the "I could be an ISA millionaire if I had not tried to market time and had diversified a bit more" stories.

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Boros10 9th Jan '14 17 of 29

In reply to post #80384

Great poem Kate. It made me smile.

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apat15 9th Jan '14 18 of 29

Really good article with lots of sage advice - thanks Boros

Would really be interested to know of your reason for selling in March 2008 ?

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nevilleaustin 9th Jan '14 19 of 29
1

Hi Leon,
Thank you for your wonderful post, and for sharing your experiences of being a private investor on the way to the magic £1,000,000 ISA.
Your market timing was amazing!
I wish that I had had the courage and foresight to have gone to cash before the summer of 2008.
Please could you let us know what your current cash percentage is with regard to a very possible small cap market correction looming over us.
With very best wishes from
Neville

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Boros10 9th Jan '14 20 of 29
13

I would like to say my decision to sell in March 2008 was because I fully appreciated what was happening with sub-prime debt and CDO's in the US. I had an understanding but like many I gained a much better understanding after the event. What I was aware of was a growing credit fuelled bubble in the UK retail and property markets which was brought "home" to me when I was offered a mortgage facility by HBOS equal to 10x the annual profits of my business!

I also thought the markets were being very complacent and were repeatedly brushing aside bad news. No one wanted the party to finish! It was the first and only time in my "investing career" that I have moved so decisively into cash. I found it incredibly difficult to do so - but so it should be. The best decisions are often the hardest ones to make.

As regards where we are today, I am concerned about valuations especially certain growth stocks and many FTSE 250 and Small Cap stocks. However, I don't feel the stocks I hold in my ISA are particularly overvalued. The weighted average P/E ratio of my ISA is currently 12.57 and the dividend yield is 3.01%.  

A respected private investing friend wrote to me today saying, "I don't believe in market timing in the short term but I do subscribe to the Howard Marks concept of being aware of where we are roughly in the cycle and I think UK small caps are heading rapidly towards the euphoria end of the spectrum. Cash is looking increasingly attractive."

The pendulum is certainly beyond the mid-point as it swings from despair to euphoria but I feel it may have further to go. Discretionary fund managers I know talk of a constant flow of new money coming into the market as investors search for yield and (some) protection from anticipated inflation. Respected fund manager Gervais Williams, CEO of Miton, believes valuations of small caps will go well beyond fair value as money chases companies capable of growing earnings in an otherwise slow growth degreared economy. Listen to his thinking.

I am certainly not in a position to call the market (one correct call in 21 years is about all I can manage!). All I would say is keep an eye on what is going on in the markets and the economy generally but more importantly keep a track of the valuations of the businesses you own.  

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lightningtiger 9th Jan '14 21 of 29
2

Boros,what a fantastic article , thank you for sharing it with us all. This clearly shows how compound interest wins with time "The money we invested back in 1993 has increased 40.04 times, representing a return of 19.45%" This sure beats the FTSE 100 estimated return increase of 4.34 times with a return of 7.33%. I was quite surprised this was done with only 17 shares. I am currently running with 23. Perhaps room for some improvement.
Love the poem Kate.
Cheers from Lightningtiger

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Ramridge 10th Jan '14 22 of 29

Hi Boros
Very much enjoyed your article and comments. Your views of what may lie ahead are particularly timely for me because my portfolio is overweight with small growth stocks. Done very well in 2013 but I need to take a more sober look looking ahead. By coincidence today's Shares magazine majors in sector analysis and sector rotation views of the FTSE 100 companies. A lot to ponder upon.
Thanks again. Ram

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valueman 13th Jan '14 23 of 29
1

Boros
Interesting article . I agree with your strategy .Its no good buying great stocks at very high prices because it is likely you will become frustrated with share price under-performance in the short term and sell them .
to grow strongly you need to focus on few good companies ,get to know them well and hold on.
i grew my Isa to £1m last year and my wife's to £740k (she has only invested since 95 )
ps I met you at AAZ agm-luckily its not in my Isa.

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Boros10 15th Jan '14 24 of 29
2

Well done Valueman, a fine investment record. AAZ is also not one of my better ideas. I've been selling down from around 33p and sold more today after the profits warning. I am now holding just a quarter of my original holding. I just wish I had been stricter with my 20% stop loss (down about 60% on the tranche sold today). I'll need a 2.5 bagger elsewhere to get my money back, significantly more difficult than the 25% gain I which would have required had I cut my losses at 20%! Anyway, it has been a very good couple of years generally so I should not be too disappointed about the odd mistake.

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valueman 16th Jan '14 25 of 29

Wonder what you think about Aberdeen Aset Mgmt -Ive jist started buying them yesterday -seem to be cheap and with very good potential for earnings increases with the SWIP acquisition. analysts seem to be targeting upto 33% higher .
Ps going to stay in AAZ to see Gosha working and the tailings plant running flat out .The warning signs are there -high expectations always missed ,lots of new debt ,falling sales price ....

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RobbOnTheRock 21st Jan '14 26 of 29

Great article, I agree with all the points raised.

I did a wee spreadsheet recently to estimate my portfolio value over 15 years assuming I continued to invest only 6k per year and averaging a 25% yearly return......this gave fund value of 900k, aggressive I know! but I hope is achievable......

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cig 22nd Jan '14 27 of 29
1

In reply to post #80808

Among 2979 pro-funds on trustnet, 5 did more than 25% annualised over the past 5 years (a very favourable period for equity) and they're not all run by imbeciles. For 15 years the numbers are not available but it would probably be zero as it's much easier to do 25% for 5 years than it is to do it for 15 years. Our host did 16%, which is extremely good, 25% is considerably harder (it's not a linear scale). So yes it's achievable, but in the way that winning Wimbledon, several times, is achievable if you play tennis. :-)

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RobbOnTheRock 22nd Jan '14 28 of 29

To be fair I think your right.

It is however a worthy ambition.

Last year I only managed a 22% rate of return, so not even hitting target in my first year ;)

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elizabeth_grey 11th Feb '14 29 of 29

I find it totally perverse that the Treasury is considering capping investments that can held in an ISA when it's so obvious that long-term saving needs to be encouraged. And congratulations on meeting that seven figure ISA mark - right now it's something that I'm aspiring too, even if I'm still in five figures!

Thanks for sharing. I started off with a managed fund from Fidelity (https://www.fidelity.co.uk/investor/isa.page) and as I've learned more and become more confident I've opened ISAs that have let me have more control over the stocks picked, hoping that this is more likely to bring me closer to my goal. 

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About Boros10

Boros10

I am an economics graduate and chartered accountant (Ernst & Young). I established a corporate finance boutique in my late twenties, became involved in my family's retail business in my forties and have returned to corporate finance with a new venture called Equity Strategies. I am a non-executive director of ShareSoc, a not for profit organisation promoting the interests of private investors. I've been investing since I was eighteen. Since establishing PEPs for my spouse and I in 1993 I have achieved an annualised IRR of over 19% and beaten the FTSE All Share (on a total return basis) in every five year rolling period. more »

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