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 [1] 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 [2] are trying to attract inflows.
This means a stream of puff pieces [3] 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:
- How long they’ve been investing
- How much they saved
- 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 [4] (Ticker: SMT). That is to say: you made a big bet on Tesla [5]? 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:
- Forgotten they had the account
- 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 [6] 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 [7] or whomever.
Now, I’ve nothing against Hargreaves Lansdown (apart from the obvious [8]) but the FSCS scheme for compensating investors [9] 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 [10].
(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 [11]
- Special Purpose Acquisition Company. Also known as a blank cheque with big fees attached. [↩ [16]]