How I’d use stocks and shares to build a seven-figure pension

This Fool explains how he is using stocks and shares and a regular savings plan to try to build a large pension nest egg for the future.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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I think it is possible for me to build a seven-figure pension using stocks and shares. I should make it clear that this is far from guaranteed. Investing can be a risky business.

While my figures show that I can build a £1m portfolio by investing, there are plenty of reasons why I may miss this target. The market could underperform, I could miss my savings target, or make the wrong investment. These are just three reasons why I may fail. There are plenty more. 

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Still, I believe I can build a large nest egg with stocks and shares, even if there are a few bumps along the road. 

Stocks and share for growth 

I am not buying any old companies for my portfolio. I am focusing on high-quality stocks. These are businesses that have high profit margins, strong balance sheets and competitive advantages

While past performance should never be used to guide future potential when investing, a company’s performance history can indicate its strengths and weaknesses. I can use this information to make an informed decision about its long-term potential. 

For example, two of my favourite stocks and shares in the FTSE 100 right now are Admiral and Prudential. These businesses have developed strong brands and competitive advantages over the past decade.

Over the next few years, they will be able to lean on these advantages to drive further growth. While they may face headwinds along the way, such as completion and rising interest rates, I think both stocks can help me hit my savings target. 

If I can earn an annual return of 12% from my basket of investments, I think I can build a seven-figure pension within 30 years. This is based on a couple of assumptions. The first is that I will be able to save £500 a month for 30 years. That is far from guaranteed. 

What’s more, there is no guarantee my investments will return 12% per annum for 30 years. If these businesses can make the most of their competitive advantages, I think they can. However, if they start to lose market share to competitors, the returns could be underwhelming. 

Saving for the future 

These risks will be present in any investment strategy so it is important for me to consider them while planning for the future. 

However, while investing in stocks and shares can help me meet my retirement goals, regular saving is far more important. I will fail to meet my target without regular savings deposits, even if my investments produce a double-digit annual return. So I will need to stick to my saving plan over the next three decades, or my whole approach could fall apart. 

While I will have to manage many risks and challenges with this approach, I believe I can build a seven-figure nest egg with the regular saving and investment plan outlined above. 

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Rupert Hargreaves owns Admiral Group. The Motley Fool UK has recommended Admiral Group and Prudential. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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