Investing £100 per week and ending up with a seven-figure portfolio may sound like a pipe dream to most people. However, it could be a much more attainable goal than it first seems due to the long-term growth potential of the FTSE 100.
By investing in a range of large-cap shares, holding them over the long run and reinvesting your dividends, you could end up with a £1m+ portfolio. By contrast, investing in a Cash ISA or savings account may mean that you experience disappointing returns that fail to improve your long-term financial situation.
FTSE 100 potential
The FTSE 100’s total annual returns since its inception 36 years ago have been around 9%. Assuming a similar rate of growth in future, a £100 investment in the index could be worth over £1m over a 34-year period. This assumes that dividends are reinvested, and that no capital is withdrawn from your portfolio.
With the FTSE 100 currently appearing to offer good value for money, its future returns could prove to be relatively impressive. For example, it has a dividend yield of 4.4%, which is above its long-term average, while major sectors such as resources, energy and financial services appear to offer many stocks that trade on low ratings compared to their historic averages. Over the long run, those valuations may revert towards their averages, which may lead to higher returns for investors in the FTSE 100.
While the FTSE 100 could catalyse your portfolio’s performance, holding cash or investing in a Cash ISA may not. At the present time, savers may struggle to obtain an income return above 1.5%. Assuming such a rate of return over the same 34-year period discussed above, paying £100 per week into a savings account would lead to a total balance of £228,000.
Clearly, there is scope for interest rates to rise over the coming decades. But history shows that cash returns have lagged the stock market’s returns, due to the lower risk of cash, which may mean that a higher regular investment than £100 per week is required to generate a £1m+ portfolio.
While the FTSE 100 is a riskier place to invest compared to cash, investors with a long-term outlook are likely to have sufficient time to enable their short-term paper losses to recover. This could mean that, while holding a modest amount of cash for emergencies is a sound move, focusing your capital on the FTSE 100 is a better idea when it comes to improving your long-term financial situation.
Of course, buying high-quality shares while they trade at low prices could enable you to beat the FTSE 100 and generate even higher returns. This could shorten the amount of time it takes to produce a £1m+ portfolio, and may lead to greater financial freedom in older age.
Peter Stephens has no position in any of the shares 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.