‘High risk? I don’t see it that way’: the investment secrets of an ISA millionaire

A 58-year old ISA millionaire reveals how they built a £1 million pot over 30 years of investment. 

“I’ve always found big uplifts in performance more worrying than big stock market declines.”

These are the words of one of interactive investor’s ISA millionaires, who, like most successful investors, sees fighting behavioural biases as one of the most important factors in building life-changing wealth.

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The investor, 58, in the South West of England, wishes to remain anonymous, but sat down with ii to chat about their route to £1 million.

The journey started early for the professional painter. “When I was nine, I saw a newspaper advert from pensions firm SunLife and filled in a form to plan my retirement. I thought school was hard work, and wrote that I wanted to retire at 18!” they said.

An early interest in saving and building wealth was linked to achieving independence as early as possible.

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“I knew I was not going to have a defined benefit pension, and would have to provide for my own retirement.”

So the investor began saving the maximum £3,000 allowed into the Personal Equity Plan (PEP) saving scheme, which was then replaced by the ISA in 1999. The allowance started at £7,000 and gradually crept up before hitting £20,000 in 2017.

“I started by maxing out in the PEP scheme and then investing what I could when it became the ISA. I have a family and children so there were years when I couldn’t save anything. It took me 30 years of saving to get to £1 million and I reached the milestone in 2021. My retirement is sorted but I am still working,” they said.

Inside the portfolio of an ISA millionaire

So, how did they get there? Investment trusts played a key role – as did a steely resolve when assessing risk and market falls.

“Buy and forget has been my approach. I tend not to trade too much and have focused on building positions in core investment trusts, and putting in money when I had it rather than drip feeding money in every month.”

Three global trusts contributed most to performance: Alliance Trust, F&C and Scottish Mortgage. There have also been some core equity holdings for 30 years, such as Diageo (LSE:DGE) and AstraZeneca (LSE:AZN). Passive funds have never been held.

“I use the Association of Investment Companies (AIC) website to research investment trusts. It is a fantastic resource. The good thing about investment trusts is you can buy them at a discount to their net asset value, but you can’t with open-ended funds.

“Good quality funds and shares do all the work for you. I’ve held AstraZeneca and Diageo since I began investing and have always been able to approach saving with a very long-time horizon.

“I don’t understand people who have short time horizons. When you feel most inclined to sell, it is the worst time to sell and the best time to buy. When the stock market is ‘dead’ in the papers, then that is a time to buy, [but] this is very hard to do,” they said.

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Alliance Trust and F&C are favourites of interactive investor customers. Both established in the 19th century, they charge just 0.6% and 0.54% a year respectively, and invest in a diversified pool of shares from around the world.

Alliance now has a “multi-manager” approach where fund manager Willis Towers Watson selects other specialist investment managers to allocate money to different parts of the stock market. F&C predominately selects Columbia Threadneedle fund managers to run various strategies, but also has holdings in private companies.

Over the past 30 years, F&C has returned 1,086% and Alliance Trust has returned 1,010%. That is an 11-fold return.

Scottish Mortgage, the other long-term investment trust position, has returned even more, at 2,346%, or more than 24 times the initial investment. Scottish Mortgage delivered its stellar returns on the back of early bets on technology shares, such as Amazon and Tesla.

The ISA millionaire got lucky with their timing for Scottish Mortgage. At the end of 2021, they withdrew a substantial portion of the ISA to pay for a second home. Cashing out a large part of their Scottish Mortgage shares at that point meant they missed a 50% drop in the share price. They still have 20% of the ISA in cash.

“Anyone that is an ISA millionaire would have held Scottish Mortgage at one point. Luckily in December 2021 we were going to buy a second home, but it fell through, so I had liquidated a lot of my portfolio before the market tanked.

“I would like to say it was skill but it was luck that I sold Scottish Mortgage, as well as JPMorgan Emerging Markets and JPMorgan European. I still own them but have sold a lot.

“The past 20 years have been amazing for investors. Values have been artificially inflated as interest rates have fallen, but that will unwind as interest rates rise. I don’t know what the portfolio will look like in terms of value in a couple of years' time.”

Other important contributors to performance over the years include: AVI Global Trust, BlackRock Energy and Resources (bought before 2022), Henderson Smaller Companies and BlackRock Throgmorton.

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A big recent purchase was JLEN Environmental Assets, an investment trust that owns renewable energy assets, such as solar and wind farms, and hydroelectric power stations and bioenergy plants.

“This should be a growth area given the energy crisis, but I was also tempted to invest back into technology shares and private equity investment trusts as share prices have fallen a lot recently.

“I am also beginning to invest more for income now as I am getting closer to retirement. The plan is to take the income to reinvest rather than hope for capital gains.”

Another recent purchase was an Ian Cowie stock tip: Canadian General Investments. “It is up 25% in the last couple of years and also pays a good income.”

The ISA millionaire has never owned bonds. “I don’t see the point. Equities grow faster than bonds, so what’s the point. People would say what I do is high risk, but I would say bonds are high risk – governments are not that trustworthy to me. I am an equity-only investor.”

The appeal of AIM

Ouranonymous case study is also a big investor in shares directly,  with a particular focus on AIM shares to avoid inheritance tax.

AIM shares currently include: Andrew Sykes, Character Group, Hummingbird Resources, Pan African Resources, Solid State and Steppe Cement .

“I own about 100 shares – this is too many. I tend not to sell things if they have done terribly.

“I enjoy investing and treat it as a bit of a game, like playing monopoly. It’s not to be taken too seriously – although it is serious, I suppose.

“I don’t recommend that anyone invests in these companies – they are high risk. Better to invest in diversified, good quality shares or investment trust. You also have to watch out for large buying and selling spreads on AIM shares,” they said.

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One big AIM winner was Highland Gold. It fell 75% initially before returning 10 times their money when it was bought by mining investor Fortiana Holdings in 2020.

“I read stock tips and then look at companies and research their prospects, which includes assessing debt levels and their business model.”

How to become an ISA millionaire

For younger investors, a tip from our case study is to try and save a monthly amount into a small group of investment trusts, and limit dealing costs by using interactive investor’s free regular investing service.

“Pound cost averaging means there is no need to worry about timing – you can forget about it. Increase monthly payments when you earn more, and then just wait.

“If you are young, then consider if you want to save for a nest egg and drive an old car, or have no nest egg and drive a new car. I have always wanted to be financially independent. It is a great comfort blanket for me,” they said.

For older investors, they offer the same advice: “Invest in good quality investment trusts and forget about it. Take responsibility for yourself and make your own decisions.”

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In addition, it is key to avoid investment fads and bubbles – and our case study speaks from experience. “I got caught up in the 1999 tech boom. I did well on some things but didn’t get out at the right time. The lesson is to be aware of speculation in markets. I’ve never touched cryptocurrencies.”

Temperament is also a key factor for successful investing, particularly how to respond when markets fall.

“I get more worried when market go up and get more confident when markets fall as I know I am getting more value for money when I invest. If you are saving for the long term, then there is no reason to be worried about the value of a portfolio.

“Big gains really distort things – they suggest a fall to come. They also distort feelings of self-worth when investments produce more financial gains than a job does.”