Forget Premium Bonds! I’d aim for a million by investing £50k in UK shares

Our writer explains why he prefers to buy UK shares rather than invest in Premium Bonds in his quest for a million-pound nest egg.

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.

The Mall in Westminster, leading to Buckingham Palace

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Should I invest in UK shares or Premium Bonds? I think there’s a clear-cut winner.

Premium Bonds are the nation’s favourite savings product. Over 22m Britons save a whopping £119bn in them, according to MoneySavingExpert‘s presenter Martin Lewis. The biggest lure is the pair of £1m prizes awarded to two lucky people each month. However, I reckon I’m more likely to secure a seven-figure sum by investing in UK stocks instead.

So here’s how I’d aim for a million with £50k to invest.

Premium Bonds

Premium Bonds are essentially akin to a savings account with a twist. I own some, but in the context of my asset allocation, I treat them like cash.

Each bond costs £1 and individuals can invest up to a maximum of £50k. Rather than offering a guaranteed return, bonds are entered into a random monthly draw with an annual prize fund rate of 3.3%.

The vast majority of bonds won’t win anything, but with some luck, I could secure tax-free prizes from £25 all the way up to £1m.

But how likely am I to win a million? The current odds of bagging the top prize are an eye-watering one in 59bn per bond.

My chances of winning some smaller prizes with £50k invested are fairly good, but the idea of becoming a Premium Bonds millionaire is a pipe dream. I’m more likely to lose money in real terms due to the corrosive impact of inflation.

UK shares

So how do UK shares compare? Well, they’re a different proposition. The stock market is volatile, so I only invest with a long time horizon in mind. Share price fluctuation means my portfolio can plummet in value over short periods.

However, over long periods, the FTSE 100 index historically returned between 6% and 8% a year. Although there’s no guarantee future returns will match this, the argument for investing in riskier assets like stocks becomes more compelling the longer my investment horizon is.

I could mirror the blue-chip benchmark’s returns by investing in a tracker fund, like the Vanguard FTSE 100 UCITS ETF.

Index trackers have a place in my portfolio, but my preferred strategy is buying individual shares. This potentially allows me to beat the average Footsie returns, but there’s always the risk my investments could underperform.

For instance, UK shares I own include aerospace company Rolls-Royce, pharmaceutical giant AstraZeneca, and housebuilder Taylor Wimpey.

On a 12-month basis, these stocks returned +58%, +14%, and -18% respectively. Those figures highlight the risks and opportunities that come with investing in the stock market.

How I’d aim for a million

I only buy stocks when I’m happy to lock money away for the long-term. For my emergency fund, I stick to cash or premium bonds due to the volatility risk associated with shares.

Let’s imagine I secured an index-beating 9% compound annual growth rate on my investments. That’s not guaranteed and I could fall well short of this goal, but it’s a good ambition to model my calculations against.

With £50k to invest, I’d have a £1m portfolio in just under 35 years! If I bought Premium Bonds instead, in all likelihood I’d still be waiting patiently for the million-pound prize 35 years later.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Charlie Carman has positions in AstraZeneca Plc, Rolls-Royce Plc, Taylor Wimpey Plc, and the Vanguard FTSE 100 UCITS ETF. He also owns Premium Bonds. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

Here’s how I’d aim to build a £50K SIPP into a £250K retirement fund

Our writer outlines the approach he would take to try and increase the value of his SIPP multiple times in…

Read more »

Investing Articles

9.4%+ yields! 3 proven FTSE 100 dividend payers I’d buy for my Stocks and Shares ISA

Our writer highlights a trio of FTSE 100 shares with yields close to 10%. He'd happily pop them into his…

Read more »

Mixed-race female couple enjoying themselves on a walk
Investing Articles

Are Raspberry Pi shares a once-in-a-lifetime chance to get rich?

With Raspberry Pi shares surging after a successful IPO, could this UK tech startup offer a long-term wealth creation opportunity…

Read more »

Newspaper and direction sign with investment options
Investing Articles

Huge gains and 9% yields: why now’s an amazing time to be a stock market investor

The stock market’s generating fantastic returns in 2024. Whether you're looking for gains or income, it’s a great time to…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

This steady dividend payer looks like one of the best bargain stocks in the FTSE 100

A yield of 4.7% and a consistent dividend record make this FTSE 100 company look like good value in an…

Read more »