ISA Millionaire? Only 2 Ingredients for massive success

As the “ISA season” draws to a close, and the mad rush to make this year’s contribution slows, it is time to figure out how to make your ISA really pay off in years to come.

There are just two requirements to becoming an ISA millionaire and they are:

• Discipline. You must ensure you use your annual ISA allowance religiously.
• Process. You need a clear idea of how you will maximise your returns, a process and the discipline (that again!) to apply it consistently, year on year.

It doesn’t matter how disciplined you are about making your ISA contribution if you don’t have a repeatable process. The problem with most strategies is that they are profitable only with the benefit of hindsight, and so aren’t repeatable.

Momentum investing is an honourable exception, with a distinguished track record going back over a century. And it is this which lies at the heart of our process for selecting funds with consistently superior profits (see the Pedigree For Momentum below).

This Is How It Works

A simple example. Today you buy the single fund which was the top performer over the last 6 months, taking into account ALL sectors. Then in 6 months you repeat the process – you sell the fund you hold, and buy the top performing fund of the most recent 6 months.

That’s it, momentum at its simplest.

The Worst Possible Time To Invest? 1999?

This was the first year you could have made an ISA investment. It was also near the top of an extraordinary bull market – the bubble was about to burst – and we have been through some extremely turbulent times since then.

Using the momentum process explained above, you began by investing into Henderson Global Equity and ended investing in L&G UK Smaller Companies Trust (up to March 2022). In the interim, you would have invested in UK and global equities, financials and natural resources.

The results are VERY impressive.

Now imagine you made the maximum ISA contribution each year from 1999 (Table 1), and you followed this strategy. It’s impressive.

You would have made an extra £2,188,548 of profits compared to the average UK growth fund (UK All Companies sector), which is the most popular sector for ISA investors (Table 2).

Or you would have made an extra £2,217,130 compared to a FTSE 100 index tracker – it goes without saying, being wary of those peddling these sorts of trackers or passives, they cost you fortunes.

Not for nothing do we call this our Bonkers Portfolio.

The annualised return since 1999 is 19.31%, compared to 4.17% for the FTSE 100 index. See full results in Table 2 below.

Oh yes, and of course these numbers are after all fund charges.

You Can Become An ISA Millionaire

If you had followed this strategy, you would have become a millionaire in 2018, 19 years after starting out in 1999.

Let’s see what would happen if those results repeated themselves in the years ahead.

If you started today, from scratch, you could be an ISA millionaire in 13 years (assuming you invested £20,000 into an ISA each year, and the annualised return for above momentum strategy, from 1999 to now, repeated itself).

That is 13 years earlier than if you matched the UK All Companies sector average...

...14 years earlier than if you matched the FTSE 100…

…and 16 years earlier than if you invested in a fund tracking the FTSE 100.

Just a bit of fun? Perhaps. Of course, we cannot know if those performance numbers will repeat themselves in the years ahead.

Yet the financial services industry desperately needs to bring to the public research and innovation that can make a difference.

This track record of success has been confirmed through extensive long-term research by FundExpert, for many fund sectors, analysing over 250 overlapping 5 year rolling periods (more here).  And if you want to get into the long grass, have a look at our “History Of Momentum”, which includes an extensive list for further reading, including volumes of research by third parties.

Risky?

At this point certain “guardians of mediocrity” in our industry (there are many) will spew out a variety of objections – it is as if they do not want you to succeed. One objection will be about risk, on which I could write another book!

But it suffices to say two things for now.

The above performance has been achieved during an extremely volatile time for investing, encompassing the bursting of the biggest bubble in 300 years, the Great Recession, and the COVID-19 pandemic.

One understandable way to measure risk (strictly speaking, volatility) is the worst monthly performance over the period. This is shown in the right-hand column of Table 2. This “bonkers” approach has a worst month similar to the average UK growth fund, but with massively more growth achieved by our strategy – more than 5x the money!

The Pedigree For Momentum

George Soros is the most famous (and successful!) exponent. Early research dates from 1937. There are hundreds, perhaps thousands, of academic papers into momentum. Nearly all confirm it continues to work, though most still struggle to explain why it works at all – it is so simple to apply it almost insults the intelligence.

A recent paper was by the famous academic trio of Dimson, Marsh and Staunton of London Business School, who are authors of the indispensable Credit Suisse Global Investment Returns Yearbook. They put the doubters to bed in their 2008 paper “108 Years of Momentum Profits”, which analysed over a century of UK stock market data (plus another 16 countries).

They concluded:

“There is extensive evidence, across time and markets, that momentum profits have been large and pervasive”

“We now know that momentum has in fact been a feature of the market for a very long time...it has been remarkably persistent”

If investors can apply their process with discipline, then they have the potential to achieve outstanding results. As David Ryan, winner of the US Investing Championship in 1985 with a momentum strategy said:

“The more disciplined you can get, the better you are going to do”

 

ACTION FOR INVESTORS

If you are new to momentum investing, take a look at how our ratings work here.

Review your funds to make sure you are invested in the best.

Save funds to your Portfolio to keep track.

 

Table 1 – Historic ISA allowances from 1999

Year	ISA Allowance
1999/20	£7,000
2000/01	£7,000
2001/02	£7,000
2002/03	£7,000
2003/04	£7,000
2004/05	£7,000
2005/06	£7,000
2006/07	£7,000
2007/08	£7,000
2008/09	£7,200
2009/10	£7,200
2010/11	£10,200
2011/12	£10,680
2012/13	£11,280
2013/14	£11,520
2014/15	£15,000
2015/16	£15,240
2016/17	£15,240
2017/18	£20,000
2018/19	£20,000
2019/20	£20,000
2020/21	£20,000
2021/22	£20,000

 

Table 2 – Using momentum to select your ISA fund

Investment	Total Value	Annualised Return	Worst Month
Our Bonkers Portfolio	£2,698,242	19.31%	-19.9%
UK All Companies Sector Average	£  509,694	4.85%	-18.4%
FTSE 100	£  486,095	4.17%	-13.4%
HSBC FTSE 100 Tracker	£  481,112	3.54%	-14.3%

Data from 01/05/1999-28/03/2022

 

Notes

The Total Value is based on investing your full ISA allowance, which totals £266,560 up to and including the 2021/22 tax year (see Table 1 above).

UK All Companies Sector Average, FTSE 100 and HSBC FTSE 100 Tracker are for comparison. Funds in the Bonkers 6-Month ISA Portfolio are selected across ALL sectors (every 6 months, with review periods in March & September).

The Worst Month is the worst performance over a calendar month for the period May 1999 to February 2022 inclusive.

Real returns for an investor following this process will diverge slightly from the returns shown above due to other factors such as switch timing and platform charges.