How to invest like an ISA millionaire

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Kyle is joined by Myron Jobson, senior personal finance analyst at interactive investor, to discuss ISA millionaires. They cover the number of ISA millionaires on the ii platform and how they invest, as well as their journeys to reach the magic seven-figure portfolio. Listen for tips on how you could reach the milestone yourself.

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Kyle Caldwell, funds and investment education editor at interactive investor: Hello. I'm Kyle Caldwell and this is On The Money, a weekly look how to get the best out of your savings and investments. So today, we're going to be looking at new data that shows how ISA millionaires made their fortunes. Joining me to discuss how and where ISA millionaires invest is Myron Jobson, senior personal finance analyst at interactive investor. Myron, great to have you on the podcast.

So, let's start off with the numbers. We've seen ISA millionaires among interactive investor customers rise significantly over the past year. Myron, could you run through those figures? And could you also touch on whether the fact that we've seen this notable increase is due to the fact that this one-year period, from the end of January 2024 to the end of January 2025, was a good period for markets generally, particularly the US market. I'm assuming that this increased the value of portfolios, particularly those that were quite close to becoming ISA millionaires?

Myron Jobson, senior personal finance analyst at interactive investor: Yeah, it certainly was. I mean, we now have 1,607 ISA millionaires on our platform. And just to put that into context, that means that we are the most popular DIY investment platform for ISA millionaires. I say that with a massive smile on my face, you know, working for an interactive investor.

But this represents a 61% increase from the figure at the January 2024. So, a lot more people have become ISA millionaires. And as you quite rightly said, ISA millionaires have likely benefited from a strong year for investment. So, the ii Index, which tracks customers' portfolio performance and is something that we do in-house, shows that the average customer with a seven-figure portfolio, and this is just not limited to ISA millionaires, achieved a return of 11.2% in 2024. So, that's a pretty decent return, isn't it?

And this outpaced the median return of 9.5% achieved by customers with a lower portfolio value. So, yes, a greater return in 2024 is a significant contributing factor to why more people became ISA millionaires. But it's not just short-term performance. The average age of an ii ISA millionaire is 73. So, basically, this tells us that many, many, many of our ISA millionaires have benefited from time in the market.

That's key. And a lot of these ISA millionaires would have had PEPs or also Tessa accounts, which predated ISA accounts, which were introduced back in 1999. So, these investors benefited from time in the market and the magic that is compound interest.

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Kyle Caldwell: I think anyone who becomes an ISA millionaire, that's a remarkable achievement. Over the years, I've spoken to some DIY investors who have achieved the seven-figure feat. And each person I've spoken to, they've all pointed out to me that they didn't know much about investing when they started but, over time, they've increased their knowledge. A lot of this was done through free resources as well online and, as a result, they've become more and more confident about making their own investment decisions and running their own portfolios.

One person I spoke to last year who, at the time, had recently become an ISA millionaire, was in his mid-50s, so younger than our average ISA millionaire age. He described it as like completing a marathon, and I thought that was a great metaphor. He said, “Investing is a marathon, not a sprint. Over time, it's the tortoise, not the hare, that wins the race. Becoming an ISA millionaire was a source of pride. I'm not a big earner, and I've not inherited mega-bucks. Becoming an ISA millionaire has been achieved through the miracle of compounding from investing early and contributing as much as possible.”

That really touches on the point you just made, Myron, about it being time in the market, not timing the market, and making the maximum use of the ISA allowance if you can over the long term.

We're going to talk more about the wonders of compound interest as well as running through some numbers that Myron has crunched that show how much you need to put into a stocks and shares ISA at different ages in an attempt to become an ISA millionaire.

But before we get to all that, Myron, there are key elements that have led to this small or growing number of investors that become ISA millionaires. And those key elements are time, patience, and investment compounding. Could you run through each of those three ingredients, which I know you describe as the not-so-secret sauce?

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Myron Jobson: I love this part because it sounds obvious, but sometimes it's just worth saying it like it is because some people might forget it's time in the market rather than timing the market. You know, they are two different things. Time in the market. The history has shown that the stock market has a knack of producing solid returns over a significant period of time. We always say, you know, in the industry that you should invest for at least five years to [allow] for the inevitable ups and downs in the stock market to smooth over for a good return, a nice smooth return over the longer period. So, this is what our ISA millionaires have benefited from, time in the market.

Patience, sometimes investing requires patience, especially ignoring short-term noise. We have had plenty of it recently, haven't we, with Trump tariffs and all affecting the stock market. But, again, investing is a long-term game. So, over the long term, we have to have patience to ride out this noise, these little jitters in the stock markets for the smooth return over the long term. So, patience is important.

Compounding is something that apparently Albert Einstein has reportedly said is the eighth wonder of the world. I don't know why everyone says that. You know, was someone there quoting him?! I don't know. But it is incredible. Interest on interest, returns on returns. Over the years, this amounts to a significant portion. So, yeah, it's really important. I think this all teaches us that the earlier you start investing, the better it is and the greater chance you have of building a really decent portfolio over time.

Kyle Caldwell: You just touched on the Albert Einstein quote, Myron. Whether or not it is authentic, I think it's a great way to get the message out there about the importance of compounding, which as you've just said, is about how investment returns themselves generate future gains, and over time, there's a snowball effect, which can help grow your wealth over the long term.

Just to add one more ingredient to your list, Myron, I think an important thing for growing wealth over the long term is making shrewd investment choices. It goes without saying that if you make smarter investment decisions and you have higher returns, then your money will grow and work harder for you over the long term. I also think it's important to take an appropriate amount of risk.

I do think there's a danger when someone's in their twenties or their thirties [and] they play it too safe, they're too cautious? For example, when you first invest in a pension, if you don't select the funds yourself, you'll be put into a default pension fund. In some instances, you'll be put into balanced managed multi-asset funds. If you're in your twenties or your thirties, you've got a lot of time for your money to grow over the long term, and you don't necessarily need to have exposure to bonds at that moment in time. But that's what a multi-asset fund will give you.

It'll typically give you 60% in shares and 40% in bonds. And another thing, as your portfolio grows over time, you may be tempted to increase the number of fund holdings, but I think it's important to have a manageable amount of funds in your portfolio. If you have too many funds, you can fall into the trap of over diversifying, and it's also just harder to manage.

The more funds you have, the more time it's going to take you to be on top of how they're performing. And if you're investing in actively managed funds, keep an eye on whether the same fund manager is in place and whether the investment strategy is the same as it was when you first bought the funds.

Anything further to add, Myron?

Myron Jobson: No. I think they're all great. I'll add that it's important to keep an eye on how much you're going to invest, so keep investment fees low. Fees may seem small, but over time, they can take a serious bite out of your return.

When I say fees, I mean platform charges, fund management fees, and also trading fees, the cost of buying and selling investments. They all add up over time. So, it's really important to keep a keen eye on these fees.

Also, this might sound simple, but it's a really important point to make, I think, is that you have to stay disciplined and don't be swayed by market noise. You know, markets, as I said earlier, they rise and fall, but knee-jerk reaction, rarely, rarely pays off.

So, a patient, consistent approach and investing regularly through the ups and downs tends to yield better results than trying to time the market.

Kyle Caldwell: So, Myron, as mentioned, you've done some number crunching into how long it'll take various age groups to become an ISA millionaire. Could you talk us through all this?

Myron Jobson: Sure. I mean, crunched these numbers as, personally, I wanted to find out how how long it would take me to become an ISA millionaire. So, what we did, our calculations assumed a 5% annual investment growth on the initial contributions, and then these contributions are then increased by 2% a year.

We chose a 2% figure to align with the Bank of England's 2% annual inflation target. And, also, we assume that the investments will be made at the start of each year. So, based on these assumptions, we looked at how people across different ages would have to top up their ISA each year to actually achieve that £1 million pot just before they reached the state pension retirement age, which is 66. So, until they reach 65, and we calculated that a 25-year-old will need to invest £6,000 in their first year, increasing their contributions annually by 2%, leading to a total contribution of just over £362,000 to become an ISA millionaire. And for someone who's 35, they will need to start with an £11,400 contribution for the first year.

And a 40-year-old will need to begin with £16,400 for the first year. I suppose it shows that when it comes to becoming an ISA millionaire, it's a lot easier if you can start at a younger age. The earlier you start, the easier it is to achieve that magical seven-figure ISA pot.

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Kyle Caldwell: So, that data model, it really does hammer home to me the importance of investing as early as possible in order to maximize the power of compounding. The longer that you have compounding working for you, you don't have to put in as much as someone who starts 10 or 20 years later than yourself.

You've done all the research in the past, Myron, on compounding, and I was hoping that you could run through this because I think it really does help to get across how compounding snowballs over the long term. This was the research you did in relation to someone investing £250 a month into an investment returning 5% a year.

And then if they carried on doing that over time, you worked out how long it would be when the investment returns pay for themselves.

Myron Jobson: Yeah, that's right. So, someone investing £250 a month into an investment returning 5% a year would experience an investment gain of £83.

So, this is on a £3,000 total contribution. So, this investment growth accounts for just under 3% in year one, and this rises to over 5% in year two and almost 14% by year five. But by year 10, investment growth will make up 30% of the portfolio. And over 20 years, it will make up 72% of the portfolio. And then there's some called the investment tipping point, and this happens at year 26 when investment growth account for 105% of the portfolio.

And this turns £78,000 worth of yearly contributions over the period into a £160,000. So, it just shows the power of compounding and the power of investing regularly.

Kyle Caldwell: I think that's great research, Myron. I think the investment tipping point example that you've shared really does show the power of compounding over the long term.

Let's now move on to, in terms of habits, what our ISA millionaires have in common. So, one of the things that they have in common, Myron, is that they do tend to be early bird ISA investors, meaning that they try and maximize their allowance at the start of the new tax year.

Myron Jobson: Exactly. I think around a third of ISA subscriptions are made at the start of new tax years. So, this is between period of the 6 April to the end of April, and it really does show that they like to start early. And I suppose it gives that extra time for compounding to do its thing.

Kyle Caldwell: Yeah. I think that's the main benefit, Myron, is that if you invest at the start of the tax year, then you've got an extra year of it working as much as it can for you as opposed to being a last-minute investor towards the end of the tax year - you've not had that year.

I also think it helps investors potentially not make last-minute hasty decisions if they've been waiting to use the allowance. If they're just trying to get the money in to use the allowance before the start of a new tax year, they may make an investment decision that they end up regretting.

Although I do think that if you're in that situation and you just want to put money into the ISA to use some of the allowance before the end of a tax year, then you could put it into something like a money market fund just for a holding period until you decide where you want to invest.

Another thing that ISA millionaires have in common, Myron, is that they are typically very active in terms of making changes to the portfolios.

Myron Jobson: Yes. So, our ISA millionaires made an average of 32 active trades per year. I suppose what that shows is that our ISA millionaires perhaps like a bargain. Perhaps they see there's changes in the market, they might see an investment that for whatever reason isn't doing too well. And so they think, right, this is an opportunity to buy low, right? So, an old investment maxim is buy low, sell high, and this shows that this is something that's not lost on our ISA millionaires.

Kyle Caldwell:  So, Myron, we've discussed the key ingredients that the ISA millionaires have, some of the traits that they have. Let's now move on to how they invest. So firstly, Myron, in terms of the type of investments, how do ISA millionaires invest versus non-ISA millionaires?

Myron Jobson:  Yeah. So, like our broader ISA customer base, investment trusts, equities and funds are the most popular asset classes among our ISA millionaires. But their portfolio weightings differ slightly. So, investment trusts, for example, they account for 41% of the average portfolio for an ii ISA millionaire, and this compares to 34% among ii's broader ISA base. Equities, it's 35% for ISA millionaires versus 26%.

And one more, let's do funds. Funds account for 13% of our average ISA millionaire portfolios compared to 22% among our broader ii ISA customer cohort. So, that's quite a significant difference.

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Kyle Caldwell: I totally agree, Myron. That is a significant gap in terms of ISA millionaires holding more in investment trusts over funds. For me, I think while investment trusts are more complicated than funds for investors to initially get their heads around, but once you've done your research, they're actually not that complicated, and they have certain bells and whistles that private investors can use to their advantage. Among those advantages are the fact that you can buy an investment trust on a cheap.

So, there's two layers of activity. An investment trust has a share price, and it has a net asset value, which reflects the value of the underlying investments held by the investment trust. Some investment trusts trade on a discount, which means that the share price is below what the net asset value is worth. And when that happens, then you have a great opportunity to buy on the cheap. And over time, if the share price and the net asset value move closer together, then you will see the performance of your investments improve as a result of that.

Another advantage is that investment trusts can gear, or borrow, to invest. Now, this does mean that they are more volatile than funds. However, over the long term, gearing can be beneficial if it is utilized successfully and if, over the long term, it is a rising market.

And another advantage to mention is simply the structure. Investment trusts, they have a fixed pool of assets. So, as mentioned, there's two layers of activity. A fixed number of shares is issued. This raises a fixed amount of money for the fund managed to invest in a portfolio of assets. And then the other layer of activity is that an investment trust has a share price that's traded on the London Stock Exchange, and that share price fluctuates according to demand and supply. But what happens with investment trusts is the fact that the fund manager does not have to sell or buy shares, depending on whether they are attracting or losing investors. And, arguably, this means that a fund manager can take more of a long-term view in running the portfolio.

Whereas with funds, open-ended funds or unit trusts as they are structured, if there's a dramatic increase in either investors putting their money into a fund or investors taking money out of their fund, then the fund manager has to deal with that. If a lot of investors are taking their money out all at once, then the fund manager has to sell some of the investments in the fund in order to raise cash to give investors their money back. On the other hand, if there's a lot of money going into a fund at the same time, then the fund manager has to deal with that as well. They have to then invest the money accordingly. Whereas with investment trusts, the fund managers do not have to deal with those situations.

Sticking with investment trusts, there was some recent research by the Association of Investment Companies (AIC), which is the trade body for the investment trust industry. So, it found that there were a total of 50 investment trusts that would have made investors more than £1,000,000 if they invested the full ISA allowance from 1999 to 2024 in the same investment trust each year. Its research found that four investment trusts would have made investors more than £2,000,000. Now it's highly unlikely that anyone would have adopted this strategy. And to be honest, in doing so you wouldn't spread your risk enough, and you wouldn't have had enough diversification.

So, I do think with this data, it should be taken with a large pinch of salt. But nonetheless, it does show that serious wealth can be made if you're patient and invest for the long haul.

So, the research found that investing a sum of just over £325,000 over a 15-year time period and then reinvesting the dividends, you'd have made over £2,000,000 tax free when investing in any of the four top performers, which are Allianz Technology Trust Ord (LSE:ATT), HgCapital Trust Ord (LSE:HGT), Polar Capital Technology Ord (LSE:PCT), and Scottish Mortgage Ord (LSE:SMT).

Myron, let's end by discussing the most popular investments with our ISA millionaires. Could you run through the top 10 and pick out some key trends?

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Myron Jobson: Sure. I should mention that ISA millionaires, as we we said earlier, they have diversified portfolios. When I say diversified, it's diversified over assets and also by regions, but they do have some investments that stand out for them. So, when we say 'most held' these are the investments that are most held by volumes by our ISA millionaires, and they tend to favor dividend-paying UK blue-chip stocks.

So, these type of investments, they account for eight of their top 10 most-held investments, again, by volume among our ISA millionaires. So, examples of these companies, which are in the top 10 of shares held are Legal & General Group (LSE:LGEN), Aviva (LSE:AV.), BP (LSE:BP.), National Grid (LSE:NG.), Lloyds Banking Group (LSE:LLOY), and Shell (LSE:SHEL).

Also, some of our ISA millionaires have reaped the benefits of exposure to what has been a burgeoning tech sector in the US. And they got this exposure through Scottish Mortgage, which is also in the top 10 list. But the income theme, I have to say, Kyle, is the one that really clearly shines the brightest among the shrewd investors.

Kyle Caldwell: I think that reflects the fact, Myron, that the average age of an interactive investor ISA millionaire is 73.

Myron Jobson: Oh, certainly does, yes.

Kyle Caldwell: So, therefore, most will likely be retired and using their investments to pay themselves an income to help fund their retirement spending.

In terms of the two investment trusts that are in the top 10, which are Alliance Witan Ord (LSE:ALW) and Scottish Mortgage, both are polar opposites in terms of approach and risk. So Alliance Witten, I'd describe it as a 'Steady Eddie' investment type. It's a global multi-manager strategy which asks a selection of external fund managers to pick 20 of their best idea stocks, and it's managed by Willis Towers Watson.

Scottish Mortgage, on the other hand, it invests in disruptive growth companies that are listed on the stock market, and it also has around a quarter of its portfolio in private companies, which retail investors, of course, cannot buy themselves. Just to give you a flavor of its approach, its top three holdings are Elon Musk's SpaceX, Amazon.com Inc (NASDAQ:AMZN), and Latin American e-commerce giant MercadoLibre Inc (NASDAQ:MELI).

Scottish Mortgage, it's posted a strong past 12 months of gains, and this is due to the fact that optimism over the potential of artificial intelligence has spread through markets. But as you alluded to earlier, Myron, it has been a volatile couple of weeks, particularly for some technology companies in light of concerns over US President Donald Trump's trade wars. However, just bear in mind with Scottish Mortgage that it is a higher-risk investment type.

And over three years, for example, its returns are less impressive. And this is due to the fact that its investment style fell out of favor due to interest rates rising. But over the long term, it has been a solid performer and it's rewarded investors that have a high risk appetite.

My thanks to Myron, and thank you for listening to this episode of On the Money. If you enjoyed it, please follow the show in your podcast app and do tell a friend about it.

If you get a chance, leave us a review or a rating in your podcast app too. You can join the conversation, ask questions to tell us what you'd like to talk about via email on OTM@ii.co.uk. And in the meantime, you can find more information and practical pointers on how to get the most out of your investments on the interactive investor website at ii.co.uk, and I'll see you next week.

On The Money is an interactive investor (ii) podcast. For more investment news and ideas, visit www.ii.co.uk/stock-market-news.