This post on the cult of the ISA millionaires is from our newest contributor, Finumus! Look forward to more unmistakable articles in the months ahead from our latest star signing.

Once again ISA season is upon us – it’s a use-it-or-lose-it allowance with a sell-by date of 5 April – and so all the platforms are trying to attract inflows.

This means a stream of puff pieces about how to join the ranks of the ISA millionaires.

All these articles are in pretty much the same style. The author finds some clients who have more than one million pounds in their ISA – with that one platform – and then asks them about:

1. How long they’ve been investing
2. How much they saved
3. What they’re invested in

The writer will then make some blasé assumptions about savings and returns, in order to persuade readers that a £1m ISA is within the reach of an ordinary investor.

They would say that though, wouldn’t they?

Leaving aside that it might be a bad idea to draw attention to these ISA oligarchs (hands up if you want an ISA Lifetime Allowance?), there’s a lot wrong with this kind of article.

Because aside from time, they don’t mention the real reasons people achieve ISA millionaire-dom: luck, poor risk management, and survivorship bias.

Luck

I don’t mean the picking-the-right stocks sort of luck. I mean the ‘having enough disposable income to save tens of thousands of pounds every year’ sort of luck.

If you’re going to max out your ISA contributions, you’re going to need £20,000 of post-tax excess income.

That’s a lot. You’ve probably got to be approaching a six-figure pre-tax income.

Of course, you’ve achieved that because of all your own hard work, right? Not because you were born into the right sort of family, went to the right sort of school, scraped into a posh university, and then got recruited on the fast-track to upper management?

No, all your own hard work. Luck has got nothing to do with it.

ISA millionaires do need to get lucky picking assets or stocks, too.

• Started in 1999 and prone to a bit of home bias? You’ve probably not made a million in the FTSE 100.

• Started a couple of years ago and went all-in on the Scottish Mortgage Trust (Ticker: SMT). That is to say: you made a big bet on Tesla? You’re probably well on your way.

So, one way to get there is to take an inappropriate amount of risk. Just put all of your £20,000 of savings into your ISA, buy a 50-bagger, and you’re done.

Which brings us to….

Poor risk management

There’s a famous and often-quoted study by Fidelity, which supposedly found that the best-performing investment accounts were those whose owners had either:

1. Forgotten they had the account
2. Died

Now as far as I know it’s apocryphal – there was no such study. But nonetheless the point is well-made.

What do these people have in common? Sure, they don’t over-trade. But also they exercise no risk management.

Let’s say you invest your whole twenty-grand into the (imaginary) Finumatic Inc. It’s a SPAC1 that’s buying an electric-spaceship-crypto-mining-NFT start-up.

Now of course this thing can go up 50-fold, which is exactly what you want if you’re to join the ranks of the ISA millionaires.

But it’s not going to do it all in one day. And while it’s going up, it’s becoming a bigger-and-bigger fraction of your wealth, asymptotically approaching 100%.

Is this exciting?

Yes.

Is this sensible?

No.

The sensible thing is to sell some on the way up, and then diversify into less exciting assets.

The dangerous thing is to just cling on with ‘diamond-hands’ and not sleep very well at night.

But of course, some people will do just that – or forget they have an account – and some of these dodgy stocks will actually go up and stay up.

(This, incidentally, is why the ‘if your great-grandad had bought $100 of Berkshire Hathaway stock you’d be a billionaire’ trope is also ridiculous. A relative would have sold some along the way.)

There’s another indicator that these people are poor risk managers, which is that they leave all their money with Hargreaves Lansdown or whomever.

Now, I’ve nothing against Hargreaves Lansdown (apart from the obvious) but the FSCS scheme for compensating investors in the event of a platform failure only covers the first £85,000 of your money.

At best, these all-in clients are being naive about how robust the so-called ‘segregation’ of client assets is when the shit-hits-the-fan.

More likely, they haven’t even thought about the worst kinds of failure.

(Either that, or they’ve got several million squirreled away across multiple platforms. But certainly not all of them).

Survivorship bias

If you’re a big DIY investment platform, you have millions of clients.

Some of them behave sensibly. Some of them behave recklessly.

Most of the reckless ones won’t get rich, but a few will become ISA millionaires! Just by chance!

Okay, they probably don’t review the lucky randoms for these articles. Still, if you take a large enough sample, and then you only talk to and about the ones who got lucky, it does give the appearance that ISA millionaire-dom is within reach of the regular punter.

When really, it’s not.

The real secret of the ISA millionaires

Source: xkcd

1. Special Purpose Acquisition Company. Also known as a blank cheque with big fees attached. [↩]

Experts have warned us to prepare for low returns from investing for years now.

Count me as skeptical about the value of such predictions.

You may recall in 2012 the UK regulator dropping a bomb on pension forecasts.

The FSA1 told financial providers to project low returns into the future, compared to the higher gains enjoyed in the past.

But as I opined at the time:

… here we have the regulator rolling up to the scene of the crime not long after the worst decade for equities relative to bonds (the worst two decades, even) to warn us – wait for it – to temper our expectations.

As far as useful advice goes, this is a bit like Eva Braun showing up in London in the middle of the Blitz to warn Churchill that her boyfriend seems a bit obsessed with guns.

The Investor, Monevator, November 2012

I suggested returns would likely be healthy going forward. Happily, that optimistic view has been borne out so far.

• Government bonds have done very well since November 2012.

• Global equities have returned more than 130% for British investors.

• We have seen relatively low returns from UK shares since 2012, but I don’t believe the FCA foresaw Brexit. Besides, the FTSE All-Share still gave you 70%, with dividends, since November 2012. Hardly a disaster.

To be fair, regulators must err on the side of caution. It’s their role. If you go to a job interview at a regulator, you should get extra marks if you sniff suspiciously over the biscuits.

Nobody should want a regulator to be mad for it.

Low returns for Generation Z

However when academics like the number-crunchers behind the Credit Suisse Global Investment Yearbook warn us to prepare for low returns in the future, you have pay some attention.

The respected trio of Dimson, Staunton, and Marsh are not a 1960s folk outfit who sang about sandals, but rather three London-based academics. And they dropped their prophecy of doom in the latest edition of their Yearbook.

The threesome point out that expected real returns (that is, returns after adjusting for inflation) from safe government bonds are very low these days. Negative, even. Not very enticing.

They then provide evidence that low real yields have previously correlated to lower returns from other asset classes, too.

Finally, they reveal the horror-graph below.

Warning! If you’re under-35 and you’ve just started investing, make sure you’re sitting down.

Source: Credit Suisse Equity Yearbook 2021

Previous generations – led by those blessed Boomers, naturally – have enjoyed many bountiful decades as investors.

Crashes have come and gone. But global equities have still delivered on average 5% or more in real terms on an annualized basis.

Bonds also did great, particularly recently. Notable given their lower risks.

However if you were born after Nirvana’s Curt Cobain shuffled off this mortal coil then you’re twice cursed.

Dimson, Staunton, and Marsh have run the numbers. They think Generation Z – those born in the mid-1990s or later – can reasonably expect to earn 3% in real terms from equities.

That is far less than the 5% or more we’ve seen previously. And it’s worse than it possibly appears at first glance.

• For example, save £10,000 a year and achieve a 5% annualised real return and you’d have nearly £700,000 in today’s money after 30 years.

• But at 3%, you’d be left with slightly less than £500,000.

Over many years, that extra 2% adds up to a whole lot more.

As for bonds, Dimson, Staunton, and Marsh expect negative real returns.

I think private investors might as well hold at least some of their bond allocation in cash nowadays, as we’ve said before. You’ll still get a negative real return, with today’s interest and inflation rates. But your cash will have zero volatility and downside, and it can be reinvested later in better times.

Note: this isn’t something to decide on a whim! Government bonds can provide proven diversification benefits versus equities in times of stress. You won’t get that from cash.

Remember you don’t have to (and probably shouldn’t) go all in/out. You could do say half your fixed income allocation in bonds, and half in cash.

What are you going to do about low returns?

Unlike in 2012, I’m not quite so ready to push back against this gloomy forecast.

For one thing, these guys are renowned academics – as opposed to a regulator with an interest in scaring us into being more financially prudent.

More importantly, we all know that risk-free government bond yields are indeed still incredibly low. Negative, in some cases, in real terms.

Clearly we must expect low returns from an asset class that’s nailed-on to give us worse than nothing, after inflation. (If we see deflation, government bonds will do better. But trust me, you don’t want to root for deflation.)

All other asset classes key off the yields available on (presumed) risk-free government bonds – especially the yield on US Treasuries.

As I’ve explained previously, this includes the returns you can expect from equities. So dumping your bonds and expecting a bumper harvest from shares is – at the least – naive.

If the academics are right (I’m not convinced returns are predictable, but they have more letters after their names than me) then what can you do?

Well, what you can’t do is change when you were born. You have to play the hand you’re given.

Focus on what you can control if you want to deploy countermeasures:

Check your investing costs

If real returns from equities are only going to be 3%, then the difference between using index funds that charge 0.4% and funds that charge 0.1% is 10% of your total expected real return. You can’t afford to waste money like a Boomer, so switch to the cheapest funds. Same goes for brokers.

Save more

Can you trim more savings from your lifestyle run-rate? Can you put more money into your pension to earn an additional employer match and a tax relief bump? Saving more is the surest driver of a better final result.

Invest for longer

A close second is allowing your money to compound for longer. Compound interest takes time. More time compounding means more years to save, too. Finally, the later you leave it to start drawing on your pot, the fewer years your portfolio will need to sustain you. Just don’t wait forever!

Lower your expectations

If you lower your expected returns and you don’t want to save more or retire later, you might make do with less. The Retirement Living Standards initiative tries to project how much income you’ll need to retire to a given level of comfort. Could you handle ‘moderate’ instead of ‘comfortable’? (I’d be wary of going down this route, especially if retiring early.)

Consider alternative assets

I’m sure it’d be appealing to have your investments work harder to take the strain, rather than you. Perhaps you could swap some of your fixed income allocation for infrastructure funds or renewable energy trusts? Yeah, maybe. The trouble is you’re often getting more equity-like volatility for potentially not hugely more return. By all means research and dabble with say 5-10% of your portfolio. But understand the trade-offs.

(Cautiously) chase yield

Similarly, government bonds from the developed economies aren’t the only fruit. You could add higher-yielding emerging market bonds, investment grade corporate bonds, junk bonds, and even preference shares. But again, you’re not getting something for nothing. At the least, swapping some safer bonds for riskier ones will mean deeper falls for your portfolio when the market dives – and potentially even permanent capital loss. Be careful.

Dabble with factor investing on the side

Academic research suggests certain kinds of shares deliver superior long-term returns, although for most of the so-called return premium / factors there’s been little sign of that in recent years. The good news is an allocation to value stocks or a small cap fund is approved even for passive investors. See our articles. The bad news is you don’t know whether your Smart Beta fund will actually lag the market over your investing lifetime.

Go to the dark side: active management

Well, well, well… fancy seeing you here. Seriously, if you’re suddenly willing to pay a fund manager 1.5% to try to get back your missing 2%, I’d think again. Active investing is a zero sum game. On average half of the people who go down this path will do worse – and there will be higher fees for all of them. As for stock picking, I do it but it’s not something to pick up because you like the sound of 10% a year. You’ve got to love the game, man! (Love it because the chances are you are going to lose at it.)

Live more uncomfortably, and do something hard

A wise man once said: if you want easy money then do something hard. Buy-to-let is a lot more hassle than owning a REIT, but you can employ an edge (find a better property), improve your investment (refurbish and remodel), and also gear up your returns (with a mortgage). That’s even more true of starting a business – or a time-sapping side hustle. You could strive for a higher salary to save more. Or you could run equities at 100% and resolve to turn your computer off for 1-10 years if (/when) there’s a big bear market. Risky, but it is an option. Especially if you’re in your 20s or 30s. You’d be paying for any higher returns with more risk (equities might never come back) and more pain (you’ll stay up at night wondering if they will.)

Remember that nobody in those previous generations were gifted those pleasant returns, not even the Boomers. Many times your parents or grandparents felt their world might be ending.

You can never bank on expected returns. That will never change.

Do-it-all

My co-blogger The Accumulator has explained how making adjustments to the dials on your investing plan is a better strategy than simply quadrupling down on risk, say.

Do a bit of everything to make the numbers work. Save a little more, retire a little later, and hold a little bit more in shares.

But don’t just stick 12% into your calculations and pray because that’s the return you need to achieve.

Hope is not a strategy.2

If we assume we’ll see low returns in the future compared to those enjoyed by previous generations, we can at least take remedial action.

And if equities do deliver 5% real returns over your investing lifetime? Thus leaving you with a fatter-than-expected pot to live on?

I’m sure you won’t be asking for a refund.

1. A now-defunct regulator, basically replaced by the FCA. [↩]
2. Although that doesn’t stop institutional investors when pitching for business. “Sure we’ll hit 10% annualised! How? We’ll add… a secret hedge fund! And a proprietary bit of private equity! Trust us – we’re in finance!” [↩]

What caught my eye this week.

A reminder that platform consolidation continues apace. Monevator readers have noticed a Legal & General statement on logging into their accounts stating they’re set to be transferred to Fidelity. Meanwhile EQi has emailed me – and I presume others, unless it thinks I smell – to confirm my account is to be spirited away to Interactive Investor.

The L&G move is the result of a £5.8bn deal struck last October. After the handover, Fidelity will administer the 300,000 accounts it acquired in the deal, but your money will remain in L&G’s funds. You can also choose to invest in a wider range of other shares and funds, too.

Fidelity claimed when the deal was struck that acquired customers would pay “the same or less”. You might want to run the numbers to check this, though.

I must confess to a bit of sentimental sadness about this particular platform consolidation. L&G was the first place I invested my money, nearly 20 years ago.

End of an era!

Twist and shout

As for the tricky Scrabble hand that is EQi-to-II, I’m not hugely upset.

Interactive Investor offers cheaper share dealing than EQi and the assets being transferred are chunky enough for me to benefit from its flat fees.

So no need for me to hunt for a cheaper alternative using TA’s peerless – albeit eye-straining – broker comparison table just yet.

Still, it’s a bit annoying.

EQi deleted some of my old Selftrade records when it took over the latter a few years ago. That meant hassle with unsheltered holdings. I’d prefer it hadn’t bothered, given it hasn’t stuck around.

There was a Know Your Customer faff, too. I hope that doesn’t happen again.

Penny Lane

Who will win as this platform consolidation plays out? How many will win? Will the winners include you and me? What will we be charged?

It all seems up for grabs.

For example I like the super-dominant Hargreaves Lansdown, both as a platform and as a monster business. But I recently sold its shares. I fear its fat margins will be squeezed by competition from the likes of Freetrade.

At the same I’ve considered upgrading my Freetrade account to the ‘Plus’ offering. This would give me access to lots more shares as well as some other good stuff – including an ISA wrapper – at a cost of £9.99 a month.

Freetrade also recently launched a SIPP, again at £9.99 a month. The gap between the legacy and upstart platforms is shrinking.1

While still very competitive versus rivals, we’re not quite talking free investing anymore. At the least, sensible investors will want to lay down £3 a month for the must-have ISA tax shield.

The Freetrade platform is slick and modern. For an active investor like me it is liberating to shuffle a portfolio around without the friction of dealing fees.

So I see plenty to like, even with some extra costs. Which is heartening, given I’m a Freetrade shareholder…

However these add-on charges highlight that there will surely be some minimum cost wherever you go at the end of this platform consolidation – at least for those who want to deal in a wide range of securities.

Free as a bird

Fair enough – everyone has to make a living and we hardly want to keep our lifesavings with brokers who can’t afford to protect them.

But does such an inescapable cost mean Hargreaves Lansdown’s margins are safe?

You’d think maybe not, because its fees for share dealing might still look egregious compared to £0 trades with Freetrade and others of its ilk.

Yet Hargreaves just reported profits boosted by rampant customer share trading!

Maybe its wealthier customers don’t mind stumping up? Perhaps they’re happy to pay a premium for its very well-established platform, and the reassurance of its great reputation for customer service?

Maybe – but how much of a premium?

I think it’s fascinating watching the industry’s combination of consolidation, competition, and cost obfuscation playing out like this.

Especially as fresh competitors will keep emerging.

For instance the 14-year old Israeli broker eToro this week announced it will go public in the US in a $10bn ‘SPAC merger’ deal. The social trading platform already operates in the UK, but it could do so with a bigger warchest if backed by a lofty market valuation.

How could that affect the incumbents?

Don’t let me down

Remember you can try Freetrade by signing up via my link and we’ll both get a free share. You don’t have to pay for those premium features, unless you want them.

I don’t just keep inserting my link to Freetrade for the freebie share – though that’s clearly part of it! Nor even because I’m a shareholder.

I really do think everyone should give one of these modern trading apps a go. You might be surprised how fluid they feel. I was.

Anyway, have a great weekend. This time next Saturday we’ll be on the eve of our first post-lockdown mini-garden parties in England…

From Monevator

How to automatically donate share dividends to charity – Monevator

How I lost £436,957 trading Tesla shares – Monevator

From the archive-ator: Index tracker costs to watch out for – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2

UK government borrowing hits February record – BBC

Cornwall overtakes London as most searched for location for movers – Guardian

Treasury raises £1.1bn in Natwest share sale; taxpayers still own 59.8% – ThisIsMoney

IR35 tax change for the private sector begins 6 April: are you affected? – Which

Scottish Mortgage Trust’s James Anderson to retire next year – Portfolio Adviser

Slipping? Retirement income prospects for Generation X [Report, PDF] – ILC

The rout in long government bonds continues to roil the tech sector – FT

Products and services

Royal Mint gold rush causes chaos for customers – ThisIsMoney

AirBnB offers estimate of what your home would rent for [Top left] – AirBnB

We both get £50 to invest at Seedrs if you sign-up via my link and invest £500 in 30 days – Seedrs

Yorkshire Building Society first to bring back 95% mortgages – Guardian

10 surprising facts about Bitcoin – The Big Picture

Eco-friendly homes for sale, in pictures – Guardian

Comment and opinion

A candid account of another early retirement gone wrong – LivingaFI

Will the inflation dog bark? – Real Returns

“I can’t possibly afford it”: how Covid dashed retirement dreams – Guardian

Bond declines ain’t so bad – The Irrelevant Investor

Get rich versus stay rich – The Belle Curve

Twelve truths – Humble Dollar

‘I gambled £50,000 on a horse and lost everything’ – BBC

Larry Swedroe: Have you been framed? – The Evidence-based Investor

Don’t worry be bullish mini-special

How to stop carrying too much financial anxiety – Incognito Money Scribe

Most people would be wise to assume markets rise – Of Dollars and Data

Ray Dalio and the power of setting defaults for optimism – AWOCS

Naughty corner: Active antics

Deliveroo offers retail investors a slice of the IPO action [Search result] – FT

Donkeys – Enso Finance

A chat with Ted Seides, author of Capital Allocators [Podcast] – Meb Faber

Analyst anchors – Klement on Investing

Is quality on sale? – Validea

The new Credit Suisse Global Returns Yearbook is out [PDF] – Credit Suisse

Covid and politics

UK death rate ‘no longer Europe’s worst’ by winter – BBC

Report finds small number of Facebook users responsible for most Covid vaccine skepticism – Guardian

My mum believes in QAnon. I’ve been trying to get her out – BuzzFeed

Marina Hyde: How long until the next Priti Patel brainwave? – Guardian

Kindle book bargains

Business Adventures: 12 Classic Tales from Wall Street by John Brooks – £0.99 on Kindle

Money Saving Book: Simple Hacks for a Happy Life by Holly Smith – £0.99 on Kindle

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £0.99 on Kindle

Billion Dollar Loser: The Epic Rise and Fall of WeWork by Reeves Weideman – £0.99 on Kindle

Buy a Kindle and you can sell all your leather bookmarks on eBay for cash!

Environmental factors

Government sets out £1bn plan to cut industrial carbon emissions – BBC

Gen Z’s high-speed rail meme dream, explained – Vox

Sperm whales in 19th century shared ship attack information – Guardian

Off our beat

The Great Amazon flip-a-thon – New York Times

Will I ever work in an office again? – Guardian

American Special Op forces are everywhere – The Atlantic

What happens when a firm introduces a five-hour workday – Fast Company

The things we go back to – Seth Godin

And finally…

“There’s zero correlation between being the best talker and having the best ideas.”
– Susan Cain, Quiet: The Power of Introverts in a World That Can’t Stop Talking

Like these links? Subscribe to get them every Friday! Like these links? Note this article includes affiliate links, such as from Amazon, Hargreaves Lansdown, Interactive Investor, and Freetrade. We may be  compensated if you pursue these offers – that will not affect the price you pay.

1. If you open a SIPP you also get a 30% discount on Plus. [↩]
2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩]