Despite their volatile nature, UK shares continue to be one of the best wealth-building devices for investors. The London Stock Exchange is home to some of the most prominent businesses in the world. And while they may not be as explosive as Nasdaq tech stocks, their long-term historical performance has demonstrated their ability to build wealth.
Looking at the UK’s leading growth index, the FTSE 250 has delivered average total gains of around 11% since its inception. And capitalising on this trend could enable investors to unlock a £10,000 passive income in the long run. Here’s how.
The power of investing regularly
The ongoing cost-of-living crisis is undoubtedly affecting countless households across the country. But despite this pressure, average savings rates are still hovering near £180 a month. Putting this money into a high-interest-bearing savings account is obviously a sensible move. But a more prudent option may be to invest this capital instead.
Assuming a portfolio can match the FTSE 250’s 11% return over the next 30 years, these regular monthly contributions could translate into a portfolio worth just over £500,000. And following the 4% withdrawal rule, that translates into a passive income of up to £20,000 a year.
However, it’s possible to push these financial achievements even higher. The easy solution is to just allocate more capital for investments each month. But not everyone is in a position to do this. So instead, an alternative is to turn to stock picking.
Instead of investing in a low-cost index fund to track the FTSE 250, investors can handpick individual companies to try and unlock superior gains. And even if the result is just an extra 2%, that’s enough to increase the nest egg and passive income by £287,000 and £11,480, respectively.
Investing isn’t risk-free
While the prospect of having a near-£800,000 portfolio and roughly £31,500 second income stream is exciting, there are some big caveats to consider. Primarily, there’s no guarantee that a custom-tailored portfolio will actually achieve the target 13% return.
Picking the right stocks is hard work, and even the best-looking investments may fail to live up to expectations. But even if an investor manages to build a top-notch portfolio, three decades is plenty of time for multiple crashes and corrections to emerge and derail the progress.
These volatile periods will undoubtedly provide new opportunities for prudent investors. However, prolonged recoveries may considerably extend the time period individuals will have to wait to hit their targets. In other words, a portfolio may be worth considerably less than expected 30 years from now.
Nevertheless, the risks associated with investing, while unavoidable, can be managed. Diversification and pound-cost averaging are two powerful yet simple strategies to help portfolios achieve better performance. And by taking a patient and disciplined approach to the stock market, it’s possible to unlock wealth-changing achievements.
