It’s never too late to start building wealth with UK shares to strive towards a life of financial freedom. Even someone in their 40s has more than enough time to benefit from the power of compounding and secure a much more comfortable retirement.
But how much money could you make? With £500 invested each month at the stock market’s 8% average long-term return for 20 years is enough to accumulate £294,510.21 when starting from scratch. But for those able to keep investing for another decade, that number jumps all the way to £745,179.72!
Here’s how to get started.
Investing’s never been easier
With a low-cost index tracker fund, investors can instantly diversify their portfolios to have a small piece of every company within a specific index. And here in the UK, the most popular index to track is the FTSE 100.
Consisting largely of defensive sectors, the FTSE 100 has proven to be far less volatile in recent years. And even though it contains mostly industry titans like Rolls-Royce (LSE:RR.), investors have nonetheless enjoyed some robust gains since 2021.
Fun fact: when including dividends, these large-cap UK shares have generated a total return of 82.6% over the last five years – an average of 12.8% a year. Yet this pales in comparison to what some stock pickers have achieved.
Jaw-dropping returns
Building a custom portfolio of top-notch UK stocks can yield far greater returns compared to relying solely on index funds. And anyone who bought shares in Rolls-Royce five years ago knows this first-hand.
Following a change of leadership, a drastic corporate restructuring, a recovery of the travel industry post-pandemic, and the expansion of defence and energy initiatives, Rolls-Royce has gone from a cash-burning business into a cash-printing giant.
The result? Shareholders have earned a staggering 1,170.7% total return, the equivalent of a 66.3% average annualised return. Anyone who’s been drip feeding £500 each month for just the last five years is now already sitting on roughly £218,963.10. And if this trend were to continue for another five years, that number would skyrocket to over £5.7m!
Time to buy Rolls-Royce?
Sadly, with a £100bn market-cap, it’s unlikely Rolls-Royce will deliver another 1,100%+ return by 2031. But that doesn’t mean the growth story’s over.
With leadership unlocking exceptional operating leverage, the company’s bottom line and free cash flow generation continue to improve even with more modest revenue growth. And now that European nations are ramping up their defence spending, Rolls-Royce is already busy capitalising on new near-term tailwinds.
Pairing this with management’s aggressive multi-billion-pound share buyback programme, Rolls-Royce shares seem on track to continue outpacing expectations.
However, no investment is ever without risk. Geopolitical escalations are creating supply chain headaches that could cause new defence and aerospace orders to be delayed.
What’s more, higher fuel costs drive up airline ticket prices. And with many consumers already being economically squeezed, travel demand could suffer, resulting in fewer flying hours for Rolls-Royce to earn maintenance service income.
There’s no denying that Rolls-Royce is a genuinely high-quality business with multiple catalysts for growth. But with expectations now high, the risk-to-reward ratio may not be as compelling today compared to 2021.
That’s why I’m personally more tempted by other UK shares with exciting long-term wealth-building potential.
