There are many millionaires in the UK who have accumulated their wealth by investing in ISAs. Over the last few years I've studied the key characteristics of these ISA millionaires closely and I've come to the conclusion that most share 10 key traits.
Last Wednesday we looked at the first four traits of an ISA millionaire. In this post we'll examine three more.
Traits of an ISA millionaire #5 - Keeping fees low
There's always a cost associated with investing. An ISA millionaire knows that even though they are a 'do it yourself' investor, they will still have to pay platform and trading fees. One way of keeping these low is to use a fund supermarket such as Fidelity’s FundsNetwork™.
I have been a client of Fidelity since 1997 and remain a client to this day. I’m also a very satisfied client, although theirs is not the only fund supermarket to choose from. At Fidelity I am charged just 0.25% as an annual platform fee and 0.25% switching fees. That means as long as you can refrain from making too many switches in any given year, costs are minimised.
Traits of an ISA millionaire #6 - ISA millionaires aim to beat the market
I’m sure you’ve heard the term ‘beating the market’ but what exactly does that mean?
Beating the market means ‘doing better’ than a particular benchmark. Beating the market is a key objective for an ISA millionaire, because they seek higher returns to achieve long-term capital growth. ISA millionaires know that beating the market helps them achieve stronger performance and arrive at their financial goals faster.
This style of investing could be viewed as high risk, however ISA millionaires manage and lower their exposure to risk by understanding and adopting four key principles:
- Time frame
- Level of wealth
- Cash reserves
- Investing knowledge.
ISA millionaires lower their exposure to risk by setting a long-term time frame, which is normally a minimum of ten years. Twenty years is better, while thirty or forty years is better still.
The second way they lower risk is to ensure that the amount they have in their ISA accounts does not constitute 100% of their overall wealth. Ideally they like the asset allocation in higher risk investments to be no more than 10% of their total net worth.
For example, they may have £1 million in ISAs, and they may be invested in aggressive growth funds with their million, but their overall net worth would maybe be £10 million. Their remaining wealth might be comprised of a combination of pensions, property, cash and bonds. By having an overall balanced portfolio, they can accept the daily fluctuations and sometimes wild swings in their ISA portfolio.
The third principle ISA millionaires adopt to help lower risk is having liquid assets put to one side. They would normally build up cash reserves of at least six to twelve months living expenses and they would hold this cash in a safe account such as a bank or building society.
Having this cash on one side gives them peace of mind and helps them sleep better at night. Knowing that they have this nice cash reserve, while only having a small percentage of their wealth exposed to ‘adventurous’ investments, also helps to build a strong emotional tolerance to the stock market's continuous ups and downs.
Finally, the fourth way an ISA millionaire lowers their risk is to focus on continuous ongoing investment education. Imagine the risk level of trying to drive a car on a motorway when you’ve never had a lesson in your life? They realise that the more they know about the market and how it works, the more the risk of investing is reduced. They study hard and read countless books and articles written by leading investment authorities. They learn that the market over the long-term always eventually goes higher, which helps them adhere to their investment strategy through the good times and the bad times.
Traits of an ISA millionaire #7 - ISA millionaires aim to trade with the market trend
An ISA millionaire aims to get in sync with the markets trend and direction.
This is important because of a rule of how the market works. The rule is, three out of four stocks move in the same direction as the market. This means the performance of the stocks or funds you choose for your Stocks & Shares ISA will be directly linked to the market’s direction.
That’s because investment funds own a large portfolio of stocks. If the market is trending up, three out of four funds will move up. But if the market is trending down, three out of four funds are going to move down. And if the market is trending sideways three out of four funds are going to move sideways.
This rule states that if you own a fund and the market takes a dive, your fund will also take a dive. This is why an ISA millionaire likes to be fully invested in an upward trending bull market and parked in the safety of cash in downward trending bear markets.
There is also another rule that ISA millionaires follow, which helps them trade with the trend. The rule is ‘75% of the market’s movement comes from institutional investors.’
Institutional investors can be fund managers, banks, building societies or insurance companies and they have the largest influence on the market’s future direction. If these 800 pound gorilla investors are buying, the an ISA millionaire aims to jump on their coat-tails. If they are selling, then an ISA millioniare aims to quickly switch to the sidelines by parking in cash.
I hope you've found this post useful and inspiring. In my next post, we'll look at the final three traits of ISA millionaires.
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