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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 Legg Mason Japan Equity and ended investing in Smith & Williamson Global Gold & Resources fund (October 2016).  In the interim, you would have invested in UK and Global equities, bonds and natural resources.

The results are VERY impressive.

For example, the annualised return since 1999 is 13.99%, compared to 4.2% from the FTSE 100 index.  See full results in Table 1 below.  If this pattern continues, and you continue to invest £15,000 each year, you could be an ISA millionaire in 2023, just another 6 years.

So How Can You 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 17 years (assuming you invested £15,000 into an ISA each year, and the annualised return for momentum investing from 1999 to now repeated itself).  

  • That is 13 years earlier than the UK All Companies sector average...
  • ...and 15 years earlier than the FTSE 100.

Just a bit of fun?  Perhaps.  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.  Moreover, this track record of success has been confirmed through separate long term research by FundExpert.co.uk, for many fund sectors, analysing over 180 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”

ACTION FOR INVESTORS

FURTHER READING

 

Table 1: Using momentum to select your ISA fund (6 April 1999 – 23 February 2017)

Investment

Total Value £ (1)

Annualized return

Monthly Max Loss (3)

ISA Momentum Portfolio

419,737

13.99

39.02

UK All Companies (2)

288,347

4.93

27.87

FTSE 100 (2)

286,685

4.20

23.13

 
(1) The Total Value is based on investing your full ISA allowance, which totals £166,360 up to the 2016/17 tax year.
(2) For comparison, only. The ISA Momentum portfolio is selected across ALL sectors every 6 months.
(3) Monthly max loss is the maximum consecutive fall wihtout a rise in any one month period.
 
The review period for the portfolio is 6 monthly periods starting from the 6th April.
Topic: Generating growth


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