I aim to double my money every five years by investing in stocks and shares. Putting it another way, I aim to achieve an annual total gain of 15%. There’s a neat maths shortcut to approximate how long it will take to double my money called the rule of 72. Essentially, divide 72 by your annual gain to calculate the doubling time.
The long-term average return from investing in stocks and shares is said to be around 8% to10%. Of course, past performance doesn’t guarantee future returns. But the period of average returns encompasses a range of scenarios including several wars, international catastrophes, and stock market bubbles.
How I’d start investing in stocks and shares
Investing in stocks and shares should be a long-term activity, in my opinion. There can be a greater element of risk involved during shorter timeframes. I try to invest for several years at the very least.
This can mitigate fluctuations caused by some of the shorter-term economic, political, and psychological factors that affect stocks and shares.
If I was starting again, I would begin my investing journey with carefully selected funds and investment trusts. I would look for funds that are global, diversified, and with competent managers.
Top fund
There are a few options that would currently be at the top of my list. Firstly, I’d invest in Fundsmith, run by veteran portfolio manager Terry Smith. The past 10-year gains have been exemplary, in my opinion. At an average annual return of 18%, the fund performed very well.
Fundsmith focuses on quality and profitability. The fund only invests in high-quality businesses that can sustain a high return on capital employed. The companies must also have business advantages that are difficult to replicate. Once found, Fundsmith aims to hold these investments for a long period.
Bear in mind, to meet stringent selection criteria, the portfolio is relatively concentrated. It holds between 20 and 30 stocks. This is fewer than many other funds and it could affect fund performance if one of the holdings were to significantly underperform. That said, given the high quality of the holdings, it’s not a major concern for me.
Top investment trust
In the long term, I’m a great believer that technology will drive human progress forward. Computing power should rapidly increase over time and this could have large implications for multiple industries. Which industries will the next generation of winners come from?
Tom Slater, joint manager of Scottish Mortgage Investment Trust (LSE:SMT) thinks healthcare, transport, transactions, and food delivery are the sectors to watch.
Investing in stocks and shares from these industries could be rewarding over the long term. This actively managed investment trust has performed incredibly well, by any standard. Its average annual return over the past five years is 38%, and over the past 10 years is 24%.
Holdings, including Tesla and Amazon, helped propel the trust to grow by 90% over the past year.
A word of warning, however. The holdings are typically high-growth companies. As such, these stocks can be more volatile. As disruptors, they can experience setbacks in addition to breakthroughs. A change in market sentiment towards high-growth stocks can also have an amplified effect on a technology fund like Scottish Mortgage.
That said, as a long-term investor willing to hold investments for over five years, I’m happy for it to form a core part of my portfolio.
