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Fairstone’s top 5 tips to investing like an ISA millionaire.

Pension & retirement

1 September 2022

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Nicola Cornish

Fairstone’s top 5 tips to investing like an ISA millionaire.

Achieving a million-pound ISA pot might sound like a stretch but you might be surprised at how achievable this goal of becoming an ISA millionaire is with some smart saving and consistent investing habits.

ISAs offer one of the most tax efficient ways to save for retirement and build wealth for the future. You can currently put up to £20,000 a year in ISAs, and any income or investment gains are free from income tax or capital gains tax – regardless of how much money you make.

ISAs are available either as cash or stocks and shares and over time you could build up a substantial amount of money while sheltering it from tax.

You can find out more about ISAs by downloading our guide

Over 2,000 people have become ISA millionaires since the tax-free wrapper was introduced 23 years ago, a few in their 30s and, astonishingly, even someone in their 20s.

Chartered Financial Planner, Nicola Cornish, shares 5 top tips on building a million pound ISA:

 

1) Start growing your ISA now

Growing your ISA will depend on two things, the amount you contribute and the rate of growth. While you can’t predict how the market will react, you can control your contributions.

With many demands on our money, particularly in the current climate, it may not be achievable to utilise your full ISA allowance each year, but the more you add and the earlier you get started, the better.

Putting aside a small amount each month can grow into a sizable sum. The important thing is getting started, and the earlier you do the more time your chosen investments have to grow.

As an example, take two investors, both investing for retirement in 40 years’ time. One starts investing £100 per month immediately, the other waits 20 years, but then invests £300 per month. The investments chosen both grow by 5% per year after charges. At retirement, the first investor will have spent £48,000 on their monthly contributions and the second investor £72,000. Yet despite having spent much less, the first investor’s retirement pot would be worth £152,602 compared to the second investor’s £123,310.

By starting early, you give yourself the best chance of harnessing the long-term growth of stock markets.

 

2) Regularly increase your contributions

Good habits can be the key to strong investment returns. While you may have regular ISA contributions in place it can be easy to forget about them. As time goes on our circumstances undoubtedly change. If you have access to more available income via a pay rise or paying off some debt, it is always a good idea to review how you could utilise the money elsewhere.

A good habit is to review your contributions every year as even a small increase over the long-term can make a big difference.

As an example, imagine you start investing £300 a month from age 30, then increase your contribution by 6% each year (as you get older and potentially earn more). You could end up with an investment pot worth over £1 million by age 68.

 

3) Diversify your portfolio

The cornerstone of any investment portfolio should always be a diverse range of assets.

Whatever your budget, your aim should be to maximise gains and minimise losses. Diversifying your portfolio is a great way to do this. Spreading your investments across different products and areas makes you less dependent on the performance of any one element and helps to smooth out returns over the longer term.

Read our ten tips for investing

 

One way to do this is by utilising managed investment funds, which allow you to spread your money across lots of different shares at the same time, spreading the risk. Some of the fund sectors that have delivered for investors over the past decade include technology, biotech and smaller companies, although it must be remembered that past performance is not a guide to future returns.

Using investment trusts can also help boost returns although they are a riskier option. These often outperform fund equivalents because they can use gearing – or borrowing to invest.

 

4) Commit to the long-term

There will always be fluctuations in the stock market as a result of political or economic situations which may cause some investors to feel unnerved and lead them to making short term knee-jerk reactions. The good news is that history shows us that recovery is inevitable and that those who stay invested for the long-term see better results than those who attempt to time the market.

Today’s ISA millionaires have seen many booms and busts and are a great example of how it is usually best to stick out tough times, remaining invested and adding to your investments. As a patient investor with a long-term horizon, time is on your side.

 

5) Remember to invest any growth

Regularly investing, and letting any increases build upon themselves, can make a huge difference over time thanks to the magic of compounding returns – using the income you earn from your investments to buy more shares in your portfolio and keep your money growing.

Compound investing works by allowing small amounts of money to grow into large amounts over time, like a snowball effect. It works best when you do nothing and just leave your money invested, making it particularly beneficial for those with long-term goals.

 

Start your journey to becoming an ISA millionaire

The route to becoming an ISA millionaire might not be a quick one but the evidence does show it is possible with commitment and discipline. To find out more about how you can maximise your investments get in touch with a Fairstone adviser today.

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The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guide to the future. The views expressed in this publication represent those of the author and do not constitute financial advice.

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