I think investing in the stock market is one of the most straightforward strategies you can use to make £1m. I believe this because, over the past 100 years, the market has proven itself to be one of the most reliable wealth-creating instruments in the world. I think this trend is almost certain to continue.
Stocks beat cash
According to a study published by investment bank Credit Suisse, over the past 120 years, UK stocks have produced an average real total return (after inflation) for investors of 5% per annum. The performance jumps to 7% before the impact of inflation.
This rate of return is particularly impressive when you consider the world went through two world wars and numerous economic declines during the period studied.
These figures correlated with the returns UK markets have produced over the past decade. Over that period, the FTSE 100 has yielded an average annual return for investors in the region of 7%, and the FTSE 250 has returned around 9% per annum.
According to my calculations, it would only require a deposit of £5 a day to make £1m in the stock market at this rate of return. This is assuming the money is invested in the FTSE 100, and deposits of £152 a month, or £1,825 a year, are increased in line with inflation.
Based on these criteria, it would take five decades of saving £5 a day to hit the £1m target, according to my calculations.
It would only take 41 years to hit the same target using the FTSE 250. Assuming an average annual rate of return of 9%, and contributions of £1,825 a year, I calculate a saver would be able to build a pension pot worth just under £1.1m with 41 years of saving.
That’s once again assuming contributions are increased in line with inflation.
Let the market do the hard work
In my opinion, the best way to invest your money to hit that magic target is to buy low-cost tracker funds. All of my figures above are based on historical returns from the FTSE 100 and FTSE 250 indexes.
All you have to do to achieve these returns yourself is to buy low-cost tracker funds, sit back, relax, and make sure you are saving enough every month to stay on track with the savings plan.
You might think picking single stocks could help you reach the million pound mark faster but, in reality, this is unlikely. Many studies have shown that individual investors don’t outperform the market over the long term, and with picking single stocks, there’s a much higher chance you’ll make a severe mistake. A single big mistake could set you back years on your journey to a million.
That’s why I believe the best instruments to use to hit this target are tracker funds, especially if you have limited experience investing.
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Rupert Hargreaves owns no share mentioned. 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.