Investing in stocks is my favourite way to try and build long-term wealth. Even as returns have improved across other asset classes, I still continue to invest almost all of my extra cash each month in FTSE 100 and FTSE 250 shares.
Times have been good for cash savers more recently following Bank of England interest rate hikes. Today people can get a healthy 5% interest rate on their instant access Cash ISA if they go with Leeds Building Society.*
But the returns on savings accounts have stilled trailed what Britain’s large-cap shares have delivered. According to investing app Curvo, Footsie shares produced an annual return of 7.9% in 2023.
Historically, the returns on savings products has long lagged those enjoyed by stock investors over the long term. And with inflation receding, savings rates should fall back towards their disappointing post-2008 financial crisis norms, with the Bank of England tipped to start slashing rates as soon as the spring.
This makes share investing even more attractive to me.
* Data from moneyfacts.co.uk.
Wanna make big profits?
Past performance is not a reliable indicator of what’s to come. But the FTSE 100’s performance over recent decades suggests I could make a big cash pile with a one-off lump sum investment.
During the past 20 years, Britain’s leading stock index has delivered a total annual return of around 7%.
Large-cap stocks are not immune to bouts of weakness when economic conditions worsen. But their multiple revenue streams, competitive advantages, and strong balance sheets mean they can still deliver impressive and reliable returns over the long term.
Let’s say that I invested £10,000 in FTSE 100 stocks. If I left it there for 30 years, and decided to reinvest all of the dividends I received, I would eventually have a retirement pot worth £81,165. That’s assuming that the Footsie continues to deliver that impressive annual rate of return.
This figure represents the enormous capital gains and passive income that these shares provide, as well as the mathematical miracle of compounding (where I earn money on my initial investment as well as reinvested dividends).
A juicy passive income
That’s profit of £71,164+ on my initial investment isn’t bad at all, I’m sure you’d agree. But can you imagine the large sums I could make if I was able to invest more than that initial £10,000?
We’ll now assume that I can buy £10,000 worth of FTSE shares every year for the next 30 years. A 7% average annual return would supercharge my nest egg to a life-changing £1,065,601.
I’d have become a stock market millionaire, and could look forward to living a comfortable retirement. Drawing down 4% of this amount each year would give me a healthy passive income of £42,624 per annum.
Investing in stocks is risker than parking my cash in the bank. But the opportunity to make a substantial regular income still makes buying UK shares a core plank of my retirement plan.
