Earlier this week, I read an interesting Telegraph article that looked at how one UK investor built up a portfolio worth £1.2m within his ISA. Amazingly, he created this fortune from a total investment of just £200,000.
So how did the private investor achieve ISA millionaire status from such a relatively modest sum? Let’s take a closer look at his strategy.
Unique investment strategy Compared to other ISA millionaires, 58 year-old David Williams (NYSE:WMB) (not his real surname) has certainly taken a unique approach to investing within his ISA.
Whereas a report from Hargreaves Lansdown (LON:HRGV) last year showed that the majority of ISA millionaires have tended to focus on dividend-paying companies and dividend-focused funds, Williams has mainly invested in more speculative growth stocks and growth-focused investment trusts and funds.
Small-cap stock focus Indeed, an analysis of Williams’ portfolio reveals that his top holding is actually £195m market-cap biotechnology firm Bioventix. This stock makes up 11% of the portfolio (around £132,000). His other small-cap stocks include Somero Enterprises (5.7% weighting), Diversified Gas & Oil (5.4%), and On The Beach Group (3.6%).
Williams says he prefers smaller companies over larger ones as “they tend to outperform and are better insulated against broader market movements.”
Growth investments Williams also has large holdings in the iShares MSCI Emerging Markets SmallCap ETF, the International Biotechnology Trust, and the Scottish Mortgage Investment Trust – all funds with a strong focus on growth.
Dividend stocks Finally, Williams does have a small allocation of dividend stocks, with names such as Unilever (LON:ULVR), Diageo (LON:DGE), and Next appearing in the portfolio, yet these three names make up just over 10% of the total portfolio.
Is this the best way to make a million? So, should investors replicate Williams’ strategy and take large punts on small-cap growth stocks and high-growth funds in an attempt to get rich quickly? Personally, I think this investment strategy is a little risky.
While large holdings in small-cap stocks can pay off handsomely if you get it right, you can also lose a lot of money if you get it wrong.
Stocks such as Bioventix and Somero can easily lose 30-40% of their value in the blink of an eye if something goes wrong. For example, Bioventix shares actually fell around 30% between October 2017 and February 2018, while Somero dropped 35% between September 2018 and December 2018. For this reason, you generally don’t see professional portfolio managers staking 11% of a portfolio on one small-cap stock.
That said, a little bit of exposure to high-growth investments is a good idea, in my view, as this can help boost overall portfolio returns. I’m a fan of the Scottish Mortgage Investment Trust, in particular, as it has a phenomenal growth track record.
Overall though, I think investors are better off aiming to build up a million slowly, and not taking large risks to achieve their financial goals. The key to making a million, in my view, is to invest regularly and compound your earnings.
Edward Sheldon owns shares in Unilever and Diageo. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo and Somero Enterprises, Inc. 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.
Motley Fool UK 2019