Stock market investing has created many millionaires over the years. And even a few billionaires if you include the excessive wealth of Warren Buffett and his peers.
But this isn’t the sole preserve of the already wealthy. A stock market crash gives ordinary investors the opportunity to embark on the road to riches. This is the time when even the best quality companies, such as those in the FTSE 100, are trading below value. Buying bargain shares during a market crash can prove very lucrative long term.
Stock market decline
UK data shows the economy in March-April contracted to a level last seen in 2002. While this may be the low point of an economic crash, recovery will be slow. As the UK starts to reopen, its troubles are far from over. The Bank of England governor has warned the deepest recession in three centuries could be on the cards. I think this means further stock market crashes are highly likely.
However, a market crash also throws up opportunities. Many of UK’s wealthiest companies, found in the FTSE 100, have been affected by the coronavirus pandemic. But, given time, I’m confident they’ll recover.
A disciplined approach to investing
Successful investors are disciplined in their commitment to investing through a regular payment plan. A Stocks and Shares ISA is the simplest place for you to set this up and start building your wealth.
It’s easy to open one and contribute a regular monthly amount. It’s also very simple to manage your portfolio actively. You can choose from a wealth of products to invest in and the tax-free allowance for the year is £20k.
Inside a Stocks and Shares ISA, you can buy individual equities, index funds that track the performance of your favourite indices, bonds, exchange-traded funds (ETFs), or investment trusts. A selection of each is a great way to diversify your portfolio and hedge against risk.
Your tax-free allowance means you can invest up to £20k, but it also means any profit you make on that sum, or dividends you receive from your shares, won’t be taxed either. That’s what makes it such a sensible option for ordinary investors. It arguably carries more risk than a traditional savings account but, equally, it offers far more scope for reward.
Becoming an ISA millionaire
On the road to becoming an ISA millionaire, compound interest is your friend. By reinvesting your dividends, you increase the interest you earn on your interest. This is the trick successful investors use to make their wealth grow substantially.
If you invest £285 a month and your investments bring you a return of 8% a year, it’ll take you around 40 years to reach £1m. This may be too far in the future for older investors, but for those young enough, it’s worth getting started. If you don’t have a 40-year time frame, this can be reduced by increasing the monthly investment, or the percentage annual return.
For risk-averse investors, the FTSE 100 offers a margin of safety. Although many FTSE 100 companies have cancelled their dividends in response to the pandemic, I’m sure they’ll reinstate them when things settle down.
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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.