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ISA Millionaire. Only 2 ingredients.

Posted by: Brian Dennehy
Membership level: Free
 
There are just two requirements to becoming an ISA millionaire and they are:
  • Discipline. You must ensure you use your annual ISA allowance religiously. It is too easy to be put off by markets still racked with uncertainty.
  • 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 to 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 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 turbulent times since then.
 
Using the momentum process explained above, you began by investing into Henderson Global Equity and ended investing in Legg Mason IF Japan Equity Hedged (March 2018).  In the interim, you would have invested in UK and global equities, financials and natural resources.
 
The results are VERY impressive.
 
For example, the annualised return since 1999 is 16.65%, compared to 4.04% from the FTSE 100 index (see full results in Table 1 below).
 
If you had followed this strategy you would have become a millionaire in 2018, 18 years after starting out in 1999.
 
You Can Become An ISA Millionaire
 
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 14 years (assuming you invested £20,000 into an ISA each year, and the annualised return for momentum investing from 1999 to now repeated itself).  
  • That is 11 years earlier than if you managed to match the UK All Companies sector average...
  • ...and 14 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. 
 
For example, consider the pedigree of Momentum investing highlighted in the next section.  This track record of success has been confirmed through separate long term research by FundExpert, for many fund sectors, analysing over 216 overlapping 5 year rolling periods (more here). 
 
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.
 
The most recent paper was by the famous academic trio of Dimson, March 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
FURTHER READING

 

 

Table 1: Using momentum to select your ISA fund (6 April 1999 – 28 February 2019)
Investment
Total Value £ (1)
Annualized return
Worst month (3)
The Bonkers ISA Portfolio
966,374
16.65
-19.85
UK All Companies (2)
367.523
5.13
-15.20
FTSE 100 (2)
322,420
4.04
-12.86
 
(1) The Total Value is based on investing your full ISA allowance, which totals £206,360 up to the 2018/19 tax year.
(2) For comparison, only. The Bonkers ISA Portfolio is selected across ALL sectors every 6 months.
(3) The Worst month is the worst performance over a calendar month for the period May 1999-Feb 2019
 
For the purposes of this analysis, the review period is March/September.  Real returns for an investor following this process will diverge slightly from the returns shown above due to other factors such as timing and platform charges.
Topic: Generating growth


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