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We are obsessed with houses in this country. It’s about how to get a first mortgage or when to get on the property ladder. Property can be lucrative, and buy-to-let is a popular investment option. But UK stocks offer another route to long-term wealth that doesn’t involve surveyor fees or boiler breakdowns.
If you wanted real wealth, say being a millionaire, I think the easiest way is to invest in stocks. And the math behind reaching £1,000,000 is surprisingly simple.
Why saving to buy a house is not enough
Even with a mortgage, before I can buy a property, I need some cash to pay the down payment. Take the average deposit on a UK house which was £53,935 in 2021.
You would have to factor in the additional costs that come with owning a home. Maybe you need to install double glazing, or maybe you need to replace the boiler. And if you were buying it to rent, you might also be considering administration fees. Let’s add £200 per month to cover these costs.
So a deposit of £53,935 along with £200 per month on a typical 30-year mortgage should have the house paid off. And in 2021, the average first-time home was worth £264,000. That’s far from a million, though house prices would likely rise over the years. But how does that compare to investing?
The magic of compound interest
The returns from investing in stocks and shares are difficult to calculate in the short term. However, I can see clear trends over longer time periods.
He FTSE 100 – the 100 largest companies on the London Stock Exchange – have returned around 8% per year since the index began in 1984. FTSE 250 has returned approximately 10% per year.
This is what happens with my starting amount of £53,935 and £200 per month assuming 9% average annual return and also 5% annual return in case of underperformance.
Time | Total | with 5% | with 9% |
0 years | £53,935 | £53,935 | £53,935 |
1 year | £56,335 | £59,086 | £61,287 |
5 years | £65,935 | £82,399 | £97,932 |
10 years | £77,935 | £118,727 | £165,627 |
20 years | £101,935 | £224,267 | £430,044 |
30 years | £125,935 | £396,179 | £1,056,015 |
Of course, a home mortgage is a must for many of us. But these calculations show why I think stocks are a better option than a buy to rent mortgage. Not to mention, owning stock is often as simple as checking a few numbers on a screen.
Also, just like paying off a mortgage sooner if I made more, I may invest more to shorten the time to get to a million or build a bigger amount.
It should be noted that inflation will make a million worth much less in the future in real terms. And there are other risks, too.
Stocks are not risk free
Many people view investing in businesses as gambling. Whereas a house is something real that they can stand on, walk on and live on.
It is true that companies can go bankrupt or simply offer horrendous returns. Lloyds Bank is down around 90% in the last 25 years, for example. Many stock prices can fall or just float on the water. And companies can also cut their dividends.
The key to managing that risk is to diversify. A varied number of different types of companies in different sectors offer the least risk. And in the long run, consistent returns of 8-10% from a diversified portfolio could make that £1,000,000 figure a reality.
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