Investing in FTSE 100 shares can sometimes be a bumpy ride. But over the long term, investment in UK blue-chip shares is a proven way to create long-term wealth.
I’m building a balanced portfolio of growth and dividend stocks to achieve this goal. A Stocks and Shares ISA packed with low- and high-risk stocks can help me reduce risk and achieve a strong rate of return.
Investing in the Footsie is certainly a better option than keeping my cash locked up in a current account. The sooner I get my money working for me, the better.
There are literally billions of reasons why, as I’ll now explain.
A £12.6bn hole
Research from the Bank of England shows that UK households have a whopping £246.2bn sitting in bank accounts that pay no interest, including current accounts. This means that — according to Hargreaves Lansdown — people are missing out on a collective £12.6bn in lost interest.
This massive figure is based on the interest that could have been generated on this sum through a tax-efficient Cash ISA paying 5.11%.
FTSE 100 vs cash
Cash ISAs are great products to help investors manage risk and store cash for an emergency. But I think investing in FTSE 100 shares is a better way for me to use my surplus cash to create wealth.
Let’s say that I invested that £8,311 in a Stocks and Shares ISA and used it to buy Footsie shares. Based on the average yearly return of 7.5% for UK blue-chip shares, I could expect to have £77,836.86 sitting in my account after 30 years.
If I put it in that 5.11% Cash ISA instead, I’d have made less than half of that (or £38,371.89, to be precise).
A top stock on my watchlist
There are several essential qualities I look for when choosing which FTSE 100 stocks to buy. These include competitive advantages like patented, market-leading products, strong brands, and sector-beating cost bases. I also look for companies with diversified revenue streams and robust balance sheets.
I also have a healthy appetite for picking up stocks that are trading below value. The theory is that, over time, the market will revalue these businesses, which in turn can generate enormous large capital gains for their shareholders.
Rio Tinto (LSE:RIO) is one such stock I currently hold in my portfolio. And I’m considering buying more of the mining giant when I next have cash to invest.
Today it trades on a forward price-to-earnings (P/E) ratio of 7.9 times. This is well below the FTSE 100 average of 10.5 times.
As an added sweetener, Rio offers up a juicy 7.3% dividend yield for 2024.
It’s true that commodities businesses face potential roadbumps in the near term as China’s economy struggles. But I still believe the possible benefits of owning this particular stock outweigh this risk, and especially at current prices.
Demand for industrial metals is tipped to soar thanks to phenomena like increasing digitalisation and urbanisation, and the growth of the green economy. And Rio Tinto is well placed to capitalise on this with its large range of base and minor metal projects.
