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How to become an ISA millionaire

Tahmina Mannan
Written By:
Tahmina Mannan
Posted:
Updated:
11/03/2013

Many Brits have ended up with large pots of money simply by investing in an individual savings accounts.

ISA season – the exciting period just before the end of the tax year- is when most people start panic-searching for the best tips and advice on what to put in their stocks and shares ISA.

But why should people care about these products? They are just tax wrappers after all…

Well, one very good reason is investing in an ISA can help you in your quest to becoming a millionaire.

Let me explain.

According to Fidelity, if an 18 year old invests the full ISA amount from April this year, by the time they had reached age 30 they would have £210,123, and by age 50 they would be a millionaire with £1,162.691 in their ISA pot, assuming a 5% growth rate.

If they didn’t start investing until age 30, they would have £1,011,955 by the age of 60.

Chris Davies, head of Fidelity Wealth, says: “These figures show what a substantial pot you can potentially build through taking regular advantage of your ISA allowance. If you can accept the higher risk compared to cash savings, the returns from stock market investing can be considerable.

“Starting early really can make a difference – put simply, it gives your money more time to grow in the market over the long run due to the magic of compounding.

“Compounding is a remarkably powerful force and the foundation of investment success. An understanding of the magic of compounding should underpin everyone’s long term saving plans – and the younger people can grasp its phenomenal power the better.

“ISAs are a fantastic use-it-or-lose-it tax perk with no further tax to pay ever and however you wish to invest, the overriding message is don’t delay and start saving now and you could become an ISA millionaire.”

According to Hargreaves Lansdown the secret to becoming an ISA millionaire is to get rich slowly: use up your ISA allowance every year and, over time, your portfolio will steadily grow.

Another tip is don’t take excessive risks; build a balanced portfolio investing across the globe with good managers. As is the case with any investment, minimise risks by diversifying what goes into your ISA.

Which fund?

It can be very difficult to decide which fund to invest in because past performance is not an indicator of future performance

A fund might have produced outstanding results in the past few years, but as is the way in the financial world – anything can happen to hit your fund.

A bull run on certain stocks could mean a stellar performance that no one predicts, but if the tide turns its performance could soon look less than brilliant.

So rather than going for what looks like a good deal now or basing decisions on past performance, industry experts suggest looking at how a fund has performed in relation to the stock market index it is linked to.

For example, if a UK mid-cap fund is up 9% over the past 12 months but the FTSE 250 has risen 12%, it has clearly underperformed.

However, if the fund has risen 14% then the manager has succeeded in beating the index. There’s no point in shelling out for a fund manager who continues to charge their fees but underperforms the market.

Similarly, short-term volatility in equities should not be the sole reason to avoid them.

Thinking long term is key to any investment, and allowing yourself to get spooked every time the market dips is a sure fire way of losing sleep and making irrational investment decisions.

Again though, you need to see how a fund has performed in relation to the index and its competitors. If the index has fallen 12% but the fund is only down 9%, then relatively the manager has done a good job.

The power of reinvesting dividends

The best way to highlight the benefits of reinvesting dividends can be seen in the below example.

Had you invested £7,000 into a stocks and shares ISA in the Invesco Perpetual High Income fund in 1988, it would now be worth £14,423 and would have produced £5,144 in income.

According to the numbers crunched by Hargreaves Lansdown, had you reinvested the income your ISA would be worth £24,026, showing the value of compounding interest and the reinvestment of dividends.


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