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Can I really make a million by investing in FTSE 100 Share?
It’s possible, but it’s not a get-rich-quick strategy. Aiming for a seven-digit sum takes time, as well as successive years of good market returns. Nonetheless, it is a worthwhile ambition, and one that I am working on in 2023.
This is how I would approach that goal.
The importance of investing
To aspire to a portfolio of 1 million pounds, I will have to save. But where should I put my savings to work once I’ve amassed a decent cash pile?
This is where the importance of investing in the stock market comes in. According to I G, the total annualized return of the FTSE 100 Index from its inception in 1984 to 2019 was 7.75% (reinvesting all dividends). Let’s compare the effect that has against a cash yield of, say, 3%.
If I started with a lump sum of £10,000 and added another £10,000 each year to that amount, this is what I would get, taking into account those two different compound annual growth rates.
| 3% CAGR | TACC of 7.75% | |
|---|---|---|
| 1 year | £10,304 | £10,803 |
| 5 years | £64,751 | £73,417 |
| 10 years | £128,352 | £166,733 |
| 20 years | £288,051 | £506,089 |
| 30 years | £503,541 | £1,240,861 |
This demonstrates the power of compounding returns. Taking the historical average of FTSE 100 shares, you would get double the return with a 3% cash return.
There are limitations to this analysis. First, past performance does not guarantee future results. It also doesn’t take into account the erosion of inflation in the real value of these amounts: £1.24 million will likely be worth less in 30 years than it is today.
However, to secure a £1m portfolio I will need to take some risk by investing in stocks.
Buy some shares of the FTSE 100
So is an index fund my best bet?
Well, I think it’s better than cash, but I think with some good stock picks it could outperform the average Footsie return.
For example, him AstraZeneca the stock price has doubled in five years and is up 20% in 12 months. The pharmaceutical giant benefits from non-cyclical demand for its medicines and I think it could continue to outperform the FTSE 100.
Another action I like is Scottish Mortgage Investment Fund, which invests in global growth stocks. It’s taken a beating recently, falling almost 30% in the last 12 months alone, but 2023 could provide some opportunities to buy cheap shares in this innovation-focused fund.
Finally, british american tobacco I also find it attractive. Although the stock price is down 1% over the past year and 34% over five years, the 7% dividend yield makes up for it in my opinion.
With a basket of stocks similar to the ones above, imagine if I generated a 12% return on my holdings. Then the true magic of compound returns becomes clear.
| 12% CAGR | |
|---|---|
| 1 year | £11,157 |
| 5 years | £80,279 |
| 10 years | £201,786 |
| 20 years | £755,065 |
| 30 years | £2,488,681 |
Of course, there are risks in this strategy. My portfolio would be less diversified at the cost of seeking higher growth. In addition, my stock picks could underperform, delaying my progress towards a £1 million portfolio or even regressing it.
However, achieving millionaire status by buying a few FTSE 100 shares is a real possibility with a long-term time horizon. Hopefully one day I can make it happen.
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