The idea of “the time value of money” is that a pound in my pocket today is worth more than it will be in a year. In the current inflationary environment, that is an easy idea to understand. It can be bad for me when it comes to spending money as it does not go as far over time.
But I think it can have a silver lining when it comes to investing. If I load up on FTSE 100 shares now, hopefully I can retire sooner than if I wait a decade to start investing. Here is why.
Long-term economic indicators
The UK’s lead index is a collection of the largest companies listed on the London Stock Exchange. Their past success does not guarantee that they will do well in future. However, firms like Barclays and Vodafone got to where they are by doing well commercially.
So, over the course of time, I would hope that investing in a broad cross-section of FTSE 100 shares could give me a portfolio that might broadly mirror the UK economy.
That would potentially help me build wealth in two ways – capital growth and dividends.
Rising tide
Over time, some FTSE 100 shares will fall. But, as a long-term investor, I would hope the index can increase in value over the decades to come. That is not guaranteed. Had I invested in Japan’s flagship Nikkei 225 index late in 1989, for example, my investment would still be worth less now than I had paid for it.
That is why valuation also matters. Back in 1989, the Japanese stock market was in a bubble. Investing in the FTSE 100 can hopefully help me benefit from the long-term performance of the UK economy. But I still need to be careful when investing and make sure I am not buying in to something I think is overvalued. As an investor, valuation always matters when buying shares for my portfolio.
Dividends
An important source of wealth creation from investing can be dividends paid by companies. Right now for example, Legal & General has a dividend yield of 7.2%. I could wait a decade or two and then load up on these FTSE 100 shares. But that would mean missing out on any dividends paid in the meantime.
If Legal & General maintains its dividend and the share price stays constant, investing £1,000 in it today and reinvesting the dividends (known as compounding) would mean that after 20 years, my holding should be worth over £4,000. That is a quadrupling of my investment, even without any rise in the share price!
Investing in FTSE 100 shares today rather than waiting until nearer retirement to do so could help me build wealth in this way.
Saving every week
To get started, I would set a regular investment goal that feels realistic, based on my own financial circumstances.
Putting £100 a week aside to invest, I could soon start building a nest egg. By compounding any dividends and hopefully benefiting from the long-term performance of carefully chosen FTSE 100 shares, I would aim to have the financial means to retire early.
