Here’s how Britain’s ISA millionaires got rich

Have ISA stocks and shares investors had a bad time lately? After all, I keep reading the headlines about a perceived lost decade for the UK stock market.

But some exciting statistics exist that should blow away the gloom and doom. According to investment platform InvestEngine, there are now more than 10,000 investors with more than £750,000 in their ISAs, on top of more than 3,000 millionaires.

But if the stock market has been going through a rough patch, why is it that so many seem to be doing so well? The ups and downs of the market can even work to our advantage if we are in it for the long haul.

Buy stocks when they are cheap

To be more precise, when the market falls, we can buy more shares for less. And we may be able to connect better dividend yields.

In his 1997 letter to Berkshire Hathaway shareholders, billionaire investor Warren Buffett wrote:

If you expect to be a net saver over the next five years, should you hope for a higher or lower stock market over that period? Many investors misunderstand this. Although they will be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.

I bet the ISA millionaires didn’t cry during the 2020 stock market crash. No, I bet they rubbed their hands with joy. And they use a whopping £20,000 ISA allowance to buy as many cheap shares as possible.

Hold on for the long haul

Investing for the long term is the biggest secret of the British ISA millionaires. And it’s actually not a secret at all.

How quickly can we reach the magic million? Earlier this year, the company invested in investment services A. J. Bell revealed that around a third of its shares and ISA were owned by millionaires Lloyds Banking Group (LSE: LLOY) shares.

The Lloyds share price has risen slightly this year. But the future dividend yield for 2024 is still 4.7%. And forecasts suggest this could rise to 6% by 2026.

Falling interest rates are likely to hit Lloyds’ lending margins, and that could justify a low price-to-earnings (P/E) ratio of less than 10. But I’m not expressing an opinion about Lloyds as an investment here.

I just think it’s a handy example for some quick sums. If I assume an average annual return of 6% from Lloyds going forward, I don’t think that would be too outrageous.

Compound magic

Basically the FTSE 100 average return over the past twenty years is closer to 7%, but 6% is good enough.

Someone who could consider investing their entire annual ISA allowance into Lloyds each year and reinvesting the dividends could become a millionaire within 24 years at that rate. Or, more sensibly, a diversified portfolio with the same average return could do this.

And diversification is exactly what ISA millionaires do. They also include Shell, GSK, National networkand other top dividend stocks from the FTSE 100 are among their favourites.