The Stocks and Share ISA deadline at the start of April really focused my mind on my portfolio. Each year, the ‘allowance’ of £20,000 resets, allowing me to invest up to £20,000 over the following 12 months and to know the returns will be tax-free. Over time, if I invest the full amount, my dividends and unrealised gains from (hopefully) rising share prices really can mount. I’d like to become an ISA millionaire one day. In this aim, there are some good pointers I can use from legendary investor Warren Buffett to help me on my way.
Stay patient… and have realistic expectations
One quote from Buffett that makes me chuckle is when he said that “you can’t produce a baby in one month by getting nine women pregnant.” He applied this to investing, and I think trying to reach ISA millionaire status is the same.
I can’t speed up the process of reaching the million mark from having lots of Stocks and Shares ISAs. I’m only allowed one with the investment ceiling of £20,000 per year. So logically, it’s going to take me many years to reach this goal. My goal can be accelerated by higher stock returns. Yet in a similar way to having a baby, good things need time and I have to be patient.
So from this, I want to ensure that I don’t get overly anxious about the speed with which my investment pot is growing.
A second piece of advice that I think is relevant to becoming an ISA millionaire is when Warren Buffett said “the rearview mirror is always clearer than the windshield.”
What I read here is that assessing the past performance of stocks is much easier than trying to predict the future. Just because a stock rose by X% last year doesn’t mean it will again next year. For my ISA, this means I need to be reasonable in the future returns I’m expecting.
For example, the FTSE 100 is up over 35% from the stock market crash a little over a year ago. But it’s unlikely it’ll increase by 35% this year. So when trying to think about a realistic timeframe to become an ISA millionaire, I need to take such exceptional years into account to avoid disappointment.
ISA millionaire: invest, don’t trade
The final piece of advice from Buffett is that “Wall Street makes its money on activity. You make your money on inactivity”. Wall Street here refers to financial companies, including the one with which I hold my ISA!
It’s no secret that one way companies like this make money is from fees when I trade in and out of stocks. Over time, these can really add up, especially if I’m flipping in and out of stocks every week.
In fact, the best way for me to reach ISA millionaire status in the long run is to be as frugal as possible on unnecessary trading. Buying is fine, but selling for short-term profits can lead me to miss out on further growth and those dealing fees will add up.
Holding stocks for the long term also lets me benefit from compounded growth. For instance, if I buy more shares with my dividend income, the next year, I’m earning X% on a bigger number of shares. Warren Buffett is a big fan of compounding!
jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.