May was a good month for many shares listed on the London Stock Exchange. On Friday, the FTSE 100 and FTSE 250 indexes each closed the month up. As I write, we do not yet know how the new month will start. But the City is debating whether broader markets may face declines in June.
It is anyone’s guess what stocks may do in the coming weeks. Yet I believe the recent Covid-19 market crash, as well as any potential further declines, may create an opportunity, especially for long-term investors. History tells us that eventually economic slumps end and robust shares go on to make new highs.
Compound interest is a powerful friend
Retirement can be expensive. Therefore, it is important to start building a retirement nest egg for those golden years as early as possible. Today, I’d like to discuss how even if you only have a few pounds to spare every week, you can invest. And your money could grow with compound interest over time to a surprisingly large amount.
Let’s assume that you are now 30, with £15,000 in savings and that you plan to retire at age 65.
You decide to invest that £15,000 in a fund now and make an additional £3,000 of contributions annually at the start of the year. You have 35 years to invest. The annual return is 6%, compounded once a year. At the end of 35 years, the total amount saved becomes £337,557.
Saving £3,000 a year would mean being able to put aside around £250 a month or about £8 a day. Might you just be wondering if you should skip that next impulse purchase or cup of coffee?
And if you were to increase the amount of annual contributions from £3,000 to £6,000, the total amount saved becomes £588,962. And finally, if you could increase the contribution amount to £9,000 a year, then you would have £840,367. That would be the power of time and compound interest at work together.
How I’d get started with FTSE investing
The most famous index in the UK is the FTSE 100 which began in 1984. Most companies in the index are multinational conglomerates.
The FTSE 250 index consists of the 101st to the 350th largest companies listed on the LSE. It was launched in 1992. Companies in it usually have a more domestic focus.
Since February, we have witnessed a market crash. Year-to-date, the FTSE 100 and FTSE 250 are down about 20.2% and 22.9% respectively. These declines mean they are now in bear market territory.
I must highlight that these decreases in index levels do not include the regular dividend payments made to shareholders. In 2019, average dividend yields for the FTSE 100 and the FTSE 250 were about 4.5% and 2.8% respectively.
Yet recent weeks have seen dividend cuts announced by many businesses. But, with a bit of due diligence, investors can still find robust dividend yields on offer. These stocks could also gain in value as the economy recovers.
There are several companies I’d consider buying, especially if there is any further weakness in their share prices. In the FTSE 100, they include BAE Systems, BHP, British American Tobacco, National Grid and Tesco.
In the FTSE 250, I like Drax, Centamin, IG Group, Paypoint and Tate & Lyle as potential long-term investments.
Making the right decisions in stock market investing is not necessarily about constantly picking winning shares and funds. Rather it is about having a long-term strategy.
