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Imagine if we could walk down a high street or drive through an industrial estate, seeing successful and hugely profitable companies, knowing that we owned a part of them. The point is, we can! All the companies in the FTSE 100 Index The index of the main shares of the London market is traded by the investing public.
In fact, I believe that consistent investment over time in carefully selected FTSE100 companies could help me build significant wealth over the long term. Here's how.
Treated and tested
First, I should explain why I'm focusing on the FTSE 100 here. After all, many of the country's largest companies are long-established businesses in mature industries. They may lack the rosy growth prospects of the world's smaller, newer companies. FTSE 250 Index or the USA Nasdaq.
But what they do have is scale, which in itself is not an indicator of past or future profitability. But overall, the FTSE 100 is a collection of many large, proven companies with considerable revenue streams that I think could endure.
Finding stocks to buy
Still, I wouldn't “buy the index” by investing in a tracking fund. Instead, I would look to carefully pick individual stocks that I believe have real long-term potential.
To do this, I would ask myself three key questions: What profitability is expected to be achieved by the business model? How could that change in the future? And how attractive is the current valuation?
A real world example
To illustrate this, consider a company whose products you have probably used in the past few days, whether you realized it or not: Unilever (LSE: ULVR). In fact, the company's products are used in several billion times a day around the world.
The company operates in markets that I expect will benefit from long-term demand, such as shampoo and body care.
Selling bars of soap may not seem like a big business, as the barriers to entry are low, after all. However, that is where the investment the company has made over many decades in creating iconic brands like Pot and Pigeon It's worth it.
Having exclusive brands, proprietary technology and unique product formulations can help a company differentiate itself from its rivals. This gives it pricing power, which in turn allows it to earn considerable profits and fund a quarterly dividend.
However, that formula can backfire. One risk I see at the moment is that the weakening economy could lead consumers to opt for supermarket own brands.
But as a long-term investor, I consider Unilever to be a solid company with great future dividend potential. If I had cash to spare, I would happily buy it for the long term.
Creating wealth over time
If I build a diversified portfolio of high-quality FTSE 100 shares at attractive valuations, I believe I could build wealth.
Imagine if you did that with £89 each week and were able to generate a compound annual growth rate of 10% (from a combination of share price growth and dividend reinvestment). That's not guaranteed, of course, but it's possible. After 30 years, you could have an investment portfolio worth more than three quarters of a million pounds!
