There were more than 4,000 Stocks and Shares ISA millionaires in the UK in April 2021, according to data obtained by from HM Revenue & Customs (HMRC). These savers, most of whom are stock market investors, were sitting on an average ISA pot of £1,397,000.
Incredibly, the data showed that the top 50 of these portfolios were worth an average £8,509,000!
How did they do this? And can I do it too?
If so, I’m very likely going to have to do these three things.
1. Try to max out the ISA allowance
Firstly, many of these investors are almost certain to have taken advantage of the full annual allowance. Currently, this stands at £20,000, an amount it’s been at for a few years now.
Of course, I may not be in a strong enough financial position yet to max out the full ISA allowance. But even contributing half that amount — the equivalent of £833 a month — would quickly add up.
However, just sitting in cash for years isn’t likely to generate attractive returns. The average rate of return for a Cash ISA is 1.2%, according to figures cited by AJ Bell. This compares unfavourably to a 9.6% average return for a Stocks and Shares ISA over the past decade.
This is why most ISA holders turn to stock market investing in search of a better net return.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
2. Invest for the long term
The great thing about the stock market is there are a few ways to win. Some investors focus solely on blue-chip companies while others try to find more dynamic smaller companies with greater growth potential.
Whichever stock market strategy I employ, though, the one thing I’m going to need to reach a seven-figure portfolio is time.
As investor Peter Lynch pointed out, “You lose money fast in the stock market. You can’t make it fast.”
In other words, it’s going to take time to build wealth. Fortuantely, though, investors have a very powerful force to help us: compound interest.
3. Take advantage of compounding
Now, let’s assume I can achieve the average 9.6% annual return cited above. This isn’t guaranteed. But if I could achieve this average, then I’d end up with £1.52m after 30 years of regular £10k contributions.
Year
Annual contribution
Total
5
£10,000
£60,566
10
£10,000
£156,349
15
£10,000
£307,823
20
£10,000
£547,371
30
£10,000
£1,525,299
Figures from Investment Calculator
This certainly demonstrates what is possible harnessing the power of compound interest.
A top candidate
For me, The Renewables Infrastructure Group (LSE: TRIG) is a solid long-term holding. This is an investment trust with assets that generate electricity from renewable energy sources.
It owns wind, solar, and battery storage assets across the UK and five European nations. It sells the electricity these assets generate and then distributes most of this income to shareholders via dividends.
The dividend yield currently stands at a juicy 6.6%. That means I’d hope to secure around £660 a year in dividends from a £10k investment.
While no dividend is ever certain, I do like the diversification here. If adverse weather prevents energy generation in one location, the rest of the portfolio in another should help offset this.
The flip side to this diverse geographic presence is potentially unwelcome regulation. Windfall taxes, for example, could eat into profits.
Despite this risk, I’m confident the world is moving slowly but surely towards renewable energy sources. So I’ve been investing in more shares to hopefully contribute towards the growth of my ISA in the years ahead.
The post 3 secrets of ISA stock market millionaires appeared first on The Motley Fool UK.
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Ben McPoland has positions in Renewables Infrastructure Group. The Motley Fool UK has recommended Aj Bell Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
