Have Stocks and Shares ISA investors had a bad time of late? After all, I keep reading headlines talking about an alleged lost decade for the UK stock market.
But there are some exciting statistics around, which should blow away the gloom and doom. According to investing platform InvestEngine, there are now more than 10,000 investors with more than £750,000 in their ISAs, on top of more than 3,000 millionaires.
But if the stock market’s gone through a rough patch, how come so many seem to be doing so well? The ups and downs of the market can actually work to our advantage, if we’re in it for the long term.
Buy shares when they’re cheap
More precisely, when the market’s down we can buy more shares for less. And we can potentially lock in better dividend yields.
In his 1997 letter to Berkshire Hathaway shareholders, billionaire investor Warren Buffett wrote:
If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
I bet the ISA millionaires weren’t crying in the 2020 stock market crash. No, I’d wager they were rubbing their hands with glee. And using as much as their £20,000 ISA allowance to buy as many cheap shares as they could.
Hold for the long term
Investing for the long term is the number-one secret of the UK’s ISA millionaires. And it’s not much of a secret at all, really.
How quickly could we build up to the magic million mark? Earlier this year, investing services firm AJ Bell revealed that about a third of its Stocks and Shares ISA millionaires held Lloyds Banking Group (LSE: LLOY) shares.
The Lloyds share price has gained a bit this year. But the forward dividend yield for 2024 still stands at 4.7%. And forecasts suggest it could rise to 6% by 2026.
Falling interest rates are likely to hit Lloyds’ lending margins, and that might justify a low price-to-earnings (P/E) ratio of under 10. But I’m not offering any opinon on Lloyds as an investment here.
I just think it’s a handy example for some quick sums. If I assume an average annual 6% return from Lloyds going forward, I don’t think that would be too outrageous.
Compounding magic
In fact, the FTSE 100 average return in the past 20 years is closer to 7%, but 6% is good enough.
Someone who could consider investing their full annual ISA allowance in Lloyds every year, and reinvest the dividends, could become a millionaire in 24 years at that rate. Or, more sensibly, a diversified portfolio that made the same average return could do it.
And diversification’s exactly what ISA millionaires do. They also include Shell, GSK, National Grid, and other top FTSE 100 dividend stocks among their favourites.
This post was originally published on Motley Fool
