The number of ISA millionaires is booming. According to HMRC, there were 5,070 of these high-net-worth individuals at the start of the 2022/23 tax year. Asset manager Rathbones notes that “the number of ISA millionaires has at least doubled every three years since 2016“.
Let’s get straight down to it: what’s their secret?
ISA benefits
There are a number of habits these successful people rely on to create wealth. One is to start early and invest regularly, to take full advantage of the compounding process. Also, reinvesting interest and dividends, to amplify the power of compound gains.
ISA users also benefit from the huge tax advantages they receive. Over time, these can be considerable. All interest on the Cash ISA, and capital gains and dividends in the Stocks and Shares ISA, are protected from tax. The result? You keep more of what you earn, which then generates additional returns non-ISA users don’t enjoy.
But here’s the thing. These tax benefits aren’t enough to generate enormous wealth over time. Ultimately, what separates the ISA millionaires from the rest is where they put their money.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
So what are they buying?
The data suggests these successful people are prioritising stock market investing.
Rathbones says that “with global equities delivering annualised returns of 17.4% since April 2023, conditions are similar to those previously associated with rapid growth in ISA millionaire numbers“.
Past performance isn’t always a reliable guide to the future. And by historical standards, that 17.4% return is pretty excellent. But even with a far lower 8% annual return, Rathbones predicts the number of millionaires could have trebled again by April 2026, to a whopping 17,600 for those that use their full £20k ISA allowance.
Is it likely that Cash ISA savers could also make a magic million or more? I’m highly doubtful, with the average yearly return of 2% lagging far behind the 8% long-term stock market average.
Here’s what I’m doing now
The good thing about my Cash ISA is it’s essentially risk free. This is unlike my Stocks and Shares ISA, where any capital I invest can fall as well as rise in value.
So what’s my strategy, then? Roughly 80% of my money’s in the stock market, and the remaining 20% held in cash. This way I manage risk according to what I’m comfortable with, while still having the chance to make a million or more.
Another tactic I use is to invest in a broad range of shares. Defensive heroes like Coca-Cola HBC (consumer staples) and Target Healthcare (medical real estate) help balance the risk I take with growth shares including Games Workshop (leisure) and HSBC (LSE:HSBA) (banking).
I’m considering increasing my holdings in HSBC when I can next invest. Why? Its delivered an average annual return of 15.2% over the past decade, through share price gains and dividends. I’m confident it can continue delivering stunning returns as its Asian growth markets take off.
I think the FTSE 100 bank will also benefit from expansion into fast-growing areas like asset management, along with the possibility of higher-than-normal interest rates. That’s even though elevated rates can dampen broader economic growth. More juicy dividends and share buybacks could give my returns an added boost.
