It is estimated that there are well over a 1,000 ISA millionaires in the UK today. These are people who have dedicated themselves to investing over long periods of time. I think the FTSE 100 is the perfect instrument to achieve a seven-figure sum.
Compounding
Returns from the FTSE 100 are dependent on capital returns from the rise of share prices and the income returns from dividends. But reinvesting dividends is the key to growing long-term wealth, as the returns quickly compound.
For example, a £10,000 investment in the FTSE 100 at the start of 1986 would have grown to over £195,000, if dividends had been reinvested. Had they not been, that figure would be less than half the total amount.
It is extremely difficult to time the bottom of the market, as nobody really knows with certainty when markets reach peaks and troughs. So it’s also crucial to stay invested through thick and thin to let compounding work its magic.
As Charlie Munger once said, “The first rule of compounding: never interrupt it unnecessarily.”
Reaching a million
The average savings of someone in the UK is £9,633, so let’s assume I start investing with that amount. Then I add in £500 every month into a FTSE 100 index tracker.
The long-term total annual return of the FTSE 100 is around 8% (that’s including capital gains and dividends payments), which means it would take 32 years to reach a million pounds.
| YEAR | ANNUAL AMOUNT (£500 x 12 months) | TOTAL AMOUNT |
| 0 | £9,633 (starting amount) | £9,633 |
| 1 | £6,000 | £19,657 |
| 5 | £6,000 | £51,090 |
| 10 | £6,000 | £112, 854 |
| 20 | £6,000 | £341,970 |
| 25 | £6,000 | £546,221 |
| 32 | £6,000 | £1,011,535 |
Of course, past performance doesn’t reliably indicate future gains. But over long periods, the stock market generates far superior returns than just sitting in cash.
Going for outperformance
But what about if I also tried to pick FTSE 100 stocks that I think could beat the market? That is, I select certain stocks that I think have the potential to return more than the 8% average of the index.
Let’s assume I did this and generated an extra 2% outperformance (making an annual 10% return). What affect could that have on my time frame?
A dramatic one, actually. It would shave over four years off the time needed to reach seven figures.
Of course, stock market returns can differ dramatically. For example, a £1,000 investment in Rolls-Royce stock five years ago would be worth just £370 today. However, an investment in Ashtead stock five years ago would today be worth £2,640 (excluding dividends).
What explains this difference? Well, engine maker Rolls-Royce’s revenue has declined 20% over five years, whereas tool rental firm Ashtead’s sales have nearly doubled. Rolls-Royce’s balance sheet was hit badly during the pandemic when civil aviation ground to a halt. However, Ashtead managed to escape relatively unscathed.
As far as growth stocks go, Ashtead still looks good to me. I actually intend to buy shares in the company before next year. Other quality growth stocks I’d consider include Diageo, Auto Trader, RELX and Experian.
And for dividend stocks, I like GSK, Legal & General, and St James’s Place. Nothing is certain, but I think a combination of these stocks could beat the market and turbocharge returns.
