How many ISA millionaires are there?

A new UK tax year has just begun, and with it a new annual ISA allowance of £20k each. ISAs are an amazing tax-break for investors who are UK taxpayers.  I love them, and have a goal to get my ISA portfolio to £1m+.  I’ve been posting updates annually about this (e.g. here, and the one before).

Why is being an ISA millionaire cool?  The £1m mark is just an arbitrary number, after all – unlike UK pensions which are capped for most of us at £1m. A million quid maintains an allure, even after the ravages of inflation.  And sensibly invested it should produce an annual income of £35k-£40k, tax free – whereas a £1m pension’s income is taxable, if it is taken.

Since the government lifted the allowance to £20k per person a few years ago (an un-noticed marriage tax break for wealthy, i.e. mainly Tory, voters), even ignorant ultra-conservative investors using just Cash ISAs can become ISA millionaire-couples in ‘only’ 25 years. But their £million won’t be worth as much as it would have been when they started, and they won’t benefit from tax-free compounding over the 25 years.

£20k here, £20k there and, pretty soon, you’re talking real money

ISAs in their current form started in 1999, when they replaced other tax-friendly savings arrangements such as PEPS, TESSAs.

Any single person who’d topped up their ISA to the maximum every year since 1999 would have, if they have just topped up their 2018/19 ISA, invested £206k in their ISA.  If this money was invested in a low-cost FTSE All Share index tracker, with no withdrawals, it would today be worth around £380k. A married couple who have doubled up the whole way will be sitting on a combined ISA pot of double this, which is over $1m.  So, in dollars, a pair of wealthy ISA-loving investors would be ISA millionaires if they have achieved market average returns over the last 19 years.

Being an individual ISA millionaire in pounds is much harder.  But if you were saving hard using the PEPs/TESSAs that preceded ISAs, you had a crucial starting advantage.  This is one of the ways that the most famous UK ISA millionaire, Lord (John) Lee did it. But if, once ISAs came along, you achieved only average market returns, you’d have had to begun your ISA journey with £187k of savings.

How could people have begun their ISA journey in 1999 with £187k savings?  The Capital PEP, which would have been the best vehicle to have used, started in 1987 with an annual allowance of £2.4k.  By 1990 it had risen to £6k.  But this means the most you could have invested before 1999 was £64.2k.

What were the chances of turning £64k into £187k in 12 years? As it turns out, the chances were very good.  The 1991-95 boom saw the FTSE All Share return over 20% per year in four of the five years.  So an ‘all in’ PEP investor, achieving average returns, would have had £159k in their ISA account on day 1.  Maintaining average returns and continuing to be ‘all in’ would have got them to around £850k today.

In fact, an ‘all in’ investor like John Lee would have only needed to outperform the market by 1% per year in order to cross the £1m threshold, which they would have done in the last 12 months.  Outperforming the market by 1% per year is no mean feat, but there are certainly countless UK investors who have done it. Of course, in the recent Brexit-y era, the more of your investments were outside the UK the more you’ll have beaten the UK market.

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Mar 2018: President Chump?

March took ages.  Heck, there was even a blue moon.  So much seemed to go wrong I am probably going to miss stuff out.

Obviously Trump started a trade war.  I’m not sure the exact impact on the markets but I think this marked a clear Sell signal for S&P500.  I often think of HSBC as a proxy for global (esp. Asian) trade, and its stock tells the story as well as any. March wasn’t particularly notable except that the miserable Q1 trend continued, with hardly any respite.

2018 04 02 HSBA.L_YahooFinanceChart

Next, and closer to home, Aviva kicked off some unwelcome news by announcing they were going to redeem their irredeemable shares.  Or something similar.  I own a bunch of similar holdings (notably NWBD and LLPC, after a helpful tip by Monevator back in 2010).  Anything which looked like a blue chip pref share with any sort of ‘irredeemable’ tag got clobbered, not entirely surprisingly.  I did a handy table mid month showing the extent of the damage inflicted, at peak. At one point I was down almost 1% of my total portfolio thanks to this mess.  Talk about unexpected correlations.

2018 03 redeemable pref shares

Fortunately, by month end Aviva had relented and these holdings had mostly regained their poise.  I think hindsight will show that we were lucky it was Aviva which played with redeemable fire here – Aviva has a strong ethical position and was successfully shouted down by small shareholders.  Had RBS/Lloyds/Santander had a crack I am not sure we’d have been so lucky.  And now it will be harder for anybody else do have a go in the future.

While we are talking about unforced errors, for some reason the global media decided March was the time to take down Facebook 50m pegs or two.  Having read Dominic Cumming’s riveting BrexitRef blog post, I somehow felt that this news horse had bolted about 18 months ago, but I must have missed something.  In any case Facebook’s market cap shed about $40bn, which is a lot of unicorns.

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Feb 2018: Vix is not a vapor rub.

Well well, February was an interesting month in the markets. For once, the markets were the news.  Heck, versus Italian general elections and German coalition building, almost anything would be interesting.

Writing about one month on, and a few days into March, I can’t even remember what triggered the commotion.

But commotion there was.  Markets fell by around 10% in early Feb.  The VIX volatility index skyrocketed and then, if memory serves, stopped being tradeable.

By the end of the month there wasn’t so much to report, except flesh wounds almost everywhere you looked. The pound fell, plus ca change, and the Ozzie markets didn’t move much, but most developed world equities ended the month down by around 3% or more.

2018 02 FIREvLondon markets exposure

But actually a 3-4% drop doesn’t capture the emotions of that first week of February.  Entering February at almost 7600, the FTSE-100 index dropped by 9 February below 7100.  And the S&P-500 fell from around 2850 at the end of January to below 2550, a fall of more than 10%, on Feb 9th.  As various blogs have reminded us, such volatility is in fact the long term norm, but it felt very unusual compared to the last few years. I felt curiously Zen about the drop – as aware of my cognitive biases as I ever have been.

Back in my ranch, I finally made the jump in moving my main portfolio tracking spreadsheet over from Microsoft Excel to Google Sheets. This is not a painless process but certainly makes updating the totals a lot easier thanks to the GOOGLEFINANCE() function.  It has however slowed me down for the various month end processes I follow – hence this post is about a week late.
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