Can I really make a million by investing in FTSE 100 shares?
It’s possible, but it’s not a get-rich-quick strategy. Targeting a seven-digit sum takes time, as well as successive years of good market returns. Nonetheless, it’s a worthwhile ambition — and one I’m working towards in 2023.
Here’s how I’d approach that goal.
The importance of investing
To aim for a £1m portfolio, I’ll need to save. But where should I put my savings to work once I’ve accumulated a decent cash pile?
This is where the importance of stock market investing comes in. According to IG, the total annualised return of the FTSE 100 index since its inception in 1984 to 2019 was 7.75% (reinvesting all dividends). Let’s compare the effect that has against a yield on cash of, say, 3%.
If I started with a £10,000 lump sum and added another £10,000 each year to that amount, here’s what I’d end up with, accounting for those two different compound annual growth rates.
| 3% CAGR | 7.75% CAGR | |
|---|---|---|
| 1 year | £10,304 | £10,803 |
| 5 years | £64,751 | £73,417 |
| 10 years | £128,352 | £166,733 |
| 20 years | £288,051 | £506,089 |
| 30 years | £503,541 | £1,240,861 |
This demonstrates the power of compound returns. Taking the historical average of FTSE 100 stocks, I’d secure double the return on a 3% cash yield.
There are limitations to this analysis. First, past performance doesn’t guarantee future results. It also doesn’t take into account inflation’s erosion on the real value of these amounts — £1.24m will likely be worth less in 30 years than today.
However, to secure a £1m portfolio I’ll need to adopt some risk by investing in stocks.
Buying a few FTSE 100 shares
So, is an index fund my best bet?
Well, I think it’s better than cash, but I reckon with some good stock picks I could beat the average Footsie return.
For instance, the AstraZeneca share price has doubled over five years, and it’s up 20% on a 12-month basis. The pharmaceutical giant benefits from non-cyclical demand for its medicines and I think it could continue to outperform the FTSE 100.
Another stock I like is Scottish Mortgage Investment Trust, which invests in global growth stocks. It’s taken a hammering recently, falling nearly 30% in the last 12 months alone, but 2023 could provide some opportunities to buy cheap shares in this innovation-focused fund.
Finally, British American Tobacco also looks attractive to me. Although the share price is down 1% over the past year and down 34% over five years, the 7% dividend yield compensates for this in my view.
With a basket of stocks similar to the ones above, imagine if I generated a 12% return on my holdings. Then the real magic of compound returns becomes clear.
| 12% CAGR | |
|---|---|
| 1 year | £11,157 |
| 5 years | £80,279 |
| 10 years | £201,786 |
| 20 years | £755,065 |
| 30 years | £2,488,681 |
Of course, there are risks to this strategy. My portfolio would be less diversified at the expense of seeking higher growth. Plus, my stock picks could underperform, which would delay my progress towards a million-pound portfolio or even send it in to reverse.
Nonetheless, achieving millionaire status by buying a few FTSE 100 shares is a real possibility with a long-term time horizon. Let’s hope one day I can make it a reality.
