The highly coveted status of being an ISA millionaire belongs to just a few thousand people in the UK. They had time and money on their side to get there, but they also followed six key investing habits that can help you too.
1. Max out your ISA
To get to £1 million, the first step is to invest the maximum each year. The most you can invest in an ISA in any given tax year is £20,000. So, if you started investing your full ISA allowance today and the ISA limit remained at £20,000, it would take you 25 years to become an ISA millionaire, assuming an average annual return of 5%. A lot of people won’t have this amount of money or time, but investing what you can into your ISA is a good habit to have.
2. Choose investments carefully
As well as the level of contributions it’s the investments you decide to place inside an ISA and how they perform that are the main drivers that will determine whether you can one day achieve ISA millionaire status.
The smart choice for any long-term investor is to have a well-diversified portfolio. The classical argument for a diversified portfolio is that it enjoys reduced volatility because when one of your investments isn’t performing so well, another will hopefully be performing strongly. By spreading your money across a range of investments, giving you exposure to different geographical regions, industries and asset classes – such as shares and bonds – you can spread your money far and wide.
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3. Invest as soon as the tax year begins
The next key part of your strategy could be to invest early in the tax year. It means you will have up to an additional year in the market, which will also help power portfolios in a rising market, as more of your assets are invested for longer.
4. Regular investing
For those who don’t have a lump sum to invest every April, there’s the perhaps more common way of investing, which is to do so each month.
As you'll be drip-feeding money in gradually, in months when the market has risen, the amount you're investing will buy you fewer shares.
But when the market has fallen, the same amount will buy you more shares. This is called pound cost averaging and can help smooth out stock market volatility.
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5. Leave your money untouched
Leaving your ISA untouched and reinvesting returns is crucial to growing your wealth. This is because through the magic of compounding your investments can grow faster – so long as you have plenty of time on your side.
In simple terms, when you invest your money it will hopefully increase in value and you’ll earn a positive return most years. Assuming it does, after the first year both the original capital and the return will benefit from any further returns in the second year. In the third year your investment is further enhanced by any returns achieved, and so on. This snowball effect is known as compounding. It's the earliest ISA contributions that have the opportunity to benefit most from compound growth over time.
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6. Setting targets
You don’t need to reach a million to be a successful investor. And not everyone is in the fortunate position to be able to invest the full £20,000 ISA allowance each year – but it doesn’t hurt to have an aspirational goal. Indeed, investment goals are an important driver for reaching targets.
Having a goal can help motivate you to keep investing regularly and to focus on the long term.