COMMENT
How To Get Rich From Shares

By David Kuo (TMFDragon)
January 5, 2006

2005 was an exceedingly good year for shares. Last year the FTSE 100 rose 17% and the FTSE All-Share index was up 18%, and that's before dividends are taken into account. Mind you, long-term stock market investors were never in any doubt that shares would continue to stage a revival. After all, over periods of five years shares have done better than other types of assets such as cash and bonds. And therein lies one of the secrets of getting rich from shares -- perseverance.

In general you should be prepared to stay invested for at least five years, and if possible a lot longer if you want to get the most from your shares. Since 1918, shares have returned an average of around 7% a year over and above inflation. So an investment of say £5,000 would have turned into, on average, almost £20,000 of buying power over the course of twenty years.

There are a few ways that we can benefit from investing in shares. But perhaps the easiest is to invest regularly in a stock market index tracker. These investments literally track the performance of a chosen index, which in turn mimics the overall performance of the stock market. It may not be quite as exciting as picking your own shares, but it certainly beats poring over reams of financial data.

There are lots of indices that you can choose to track. These include the FTSE 100 and the FTSE All-Shares Index. In fact, you can even track overseas stock market indices such as the US or Chinese markets if you want.

The main advantage of investing through index trackers is that their charges are very low compared with other funds. And paying attention to charges is another vital consideration if you want to get rich from shares. Whatever you pay in charges can seriously affect the long-term investment return of your investment.

Another advantage of going down the index tracker route is that you can invest little and often. For instance, you can put as little as £25 a month into an index tracker. This may not seem like much, but over twenty years say, it could grow through a combination of regular investing and compounding to almost £13,000!

Finally, you should try to keep your investments as far away as possible from the clutches of the taxman. One of the best ways to do that is to make sure they are wrapped up in an ISA. The ISA wrapper will ensure that any capitals gains you make is exempt from tax. Generally, it does not cost any more to hold an index tracker in an ISA, but not doing so could cost your dearly especially if you plan to invest for a long time.

So, if you don't already have an index tracker then why not start one today. In fact, you can invest in the UK's biggest index tracker right here via the Fool!