While the performance of the FTSE 100 has been hugely disappointing in recent years, the UK’s main index still has the potential to turn anyone into a millionaire. That may sound an optimistic statement, but anyone able to put by even a relatively small sum on a regular basis to invest in the UK’s biggest shares could easily become a millionaire.
That’s because the FTSE 100 has historically delivered an annualised return of over 9% per annum. Such a rate of return, when applied over a long period of time, could have a hugely positive impact on your wealth. For example, investing £1,000 now and obtaining such a rate of return over a 25-year period would leave you with a sum of over £8,600.
However over the long run, the FTSE 100 could record an even higher rate of return. That’s not to say that it will be devoid of the types of problems it has experienced since its inception in 1984 (since when it has delivered an annual return of 9%), but because the FTSE 100 appears to offer excellent value for money. For example, it trades on a price-to-earnings (P/E) ratio of around 14 and this indicates that it could be the subject of an upward rerating. Furthermore, a dividend yield of around 4% also shows that the FTSE 100 offers good value for money right now.
Growth catalysts
Of course, a low valuation isn’t enough to generate high returns. Catalysts are needed in order to improve investor sentiment and push the FTSE 100’s level higher. On this front, there’s a great deal for investors to be optimistic about. For example, China has huge potential to continue to be the engine room of global economic growth, with the world’s second largest economy set to successfully transition towards a more consumer-focused outlook. With many millions of Chinese expected to see their incomes rapidly increase in future, the FTSE 100’s consumer services and financial institutions in particular could see their bottom lines rapidly rise.
Another potential catalyst to push the FTSE 100 higher is the improving performance of the US economy. Although it’s not yet fully recovered from the financial crisis and is still benefitting from an ultra-loose monetary policy, it’s on the right track to deliver strong growth numbers over the long run. And with the Federal Reserve having repeatedly stated that interest rate rises will be slow rather than fast, the US economy could move from strength to strength and drag the rest of the global economy with it.
While the potential for a Brexit could hold the FTSE 100 back in the short run, the reality is that the UK’s main index appears to offer good value for money and has multiple catalysts through which to record excellent annualised growth. While the path to riches may not be a smooth one and there will inevitably be lumps and bumps along the way, buying shares in FTSE 100 companies now could help you reach millionaire status.
