UK stocks haven’t performed particularly well over the past 12 months. The FTSE 100 is up just 3%, while the FTSE 250 is down 15% — the latter is generally considerable a better reflection of the British economy.
But in the long term, I’m confident that the general trend for these two indexes will be upwards. For example, the FTSE 100 is roughly four times bigger today than it was 30 years ago, and around seven times bigger than when the index was launched.
So, is it realistic to aim for a million as a private investor with limited funds? Well, it naturally depends on how much capital I have at my disposal. But it is also reliant on me making sensible and well-informed decisions.
Learning from the best
I’m taking my inspiration from legendary US investor Warren Buffett. Buffett, the chairman and CEO of Berkshire Hathaway, is known as a value investor. Value investing involves picking stocks that appear to be trading for less than their intrinsic or book value.
The so-called ‘Oracle of Omaha’ always searches for a margin of safety. This means Buffett is looking for the valuation of the company to be discounted against his perceived intrinsic value.
The margin of safety is a defensive tactic, in theory reducing the risk of losses, but it equally can propel my portfolio upwards when the market recovers.
Buffett has another piece of stellar advice. Stick to what you know. Buffett doesn’t invest in things he doesn’t understand. And that makes sense because it can be hard to accurately assess how much a company is worth.
The Oracle of Omaha invests a lot of his money in household names, such as Coca-Cola. And that’s because he sticks with what he knows best. He also tells us to invest in a limited number of stocks that we’re very confident in, instead of tens of speculative investments.
A long-term strategy
Following Buffett’s example will help me make sensible choices. But how can I turn my savings into a million?
Well, for me, it’s all about compound returns. This is essentially the process of reinvesting my dividends year after year and earning interest on my interest.
For example, if I had £100,000 and I invested it all in stocks paying a 5% dividend yields on average, after 30 years of reinvesting my dividends, I’d have nearly £500,000.
But that calculation doesn’t take share price growth into account. Based on historical growth rates of the FTSE 100, in 30 years, that £500,000 could be worth nearly £2m.
But what if I don’t have £100,000 to invest now — let’s face it, most of us don’t.
Well, then I need to realise the value of investing regularly.
If I started with just £10,000, and invested it all in stocks paying a 5% yield on average, while adding £600 a month, after 30 years, I’d have £540,000. Taking into account share price growth based on historical data, and the fact that I’d be investing over 30 years, that figure could be worth more than £1m.
