According to the NS&I website, the odds of winning any prize for each £1 invested in a Premium Bond is 24,500 to one. In other words, the chances of winning a small prize are low and the probability of winning a big prize is even smaller. I reckon there’s a better opportunity to build wealth with FTSE shares.
How FTSE shares can help you build wealth
It’s easy to talk about poor odds of winning, but it works out in practice well. For example, my father’s £50 investment in Premium Bonds has been in place for more than 50 years. Yet he’s never won a big prize and the small amounts he has won have failed to make up for the erosion of his money because of inflation.
But FTSE shares are different. Underlying every share is a business capable of increasing its earnings and assets. If you choose carefully, shares can be an investment in a business that grows over time. The increase in value can make your invested money grow. On top of that, many companies pay shareholder dividends. And you can choose to either take that money as income or plough it back into your investments.
However, if you want to build wealth as quickly as possible, it can be a good idea to plough your dividends back into your investments. If you do that you’ll be compounding your gains. And the process of compounding is key to generating wealth.
Compounding accelerates over time. So, if you stick with a programme of investment and compound your gains over years, you could end up with returns to rival a big win in Premium Bonds.
I’d invest within a Stocks and Shares ISA
I’d begin by opening a Stocks and Shares ISA. Then I’d aim to pay regular money into the ISA. For me, a monthly payment would be ideal as soon as I get my wages. Within the ISA, you can invest in many FTSE shares from either the FTSE 100 index or the FTSE 250 index.
Some great names are offering good value right now, such as pharmaceutical giant GlaxoSmithKline. And with some investing experience under your belt, you could even consider smaller firms that could have more room to grow.
However, at the beginning of your journey, it can be a good idea to start investing in funds. You could choose managed funds or index tracker funds, for example. And both types have advantages over the shares of individual companies. Indeed, it’s hard to get enough diversification between shares before you’ve built up a sizeable sum to invest.
However, funds will give you instant diversification across many underlying companies, and at low cost.
Funds also accept low monthly investment sums. So, you can put as little as £25 into a fund in one transaction – something that’s not worth doing with individual company shares because of transaction costs.
And a third advantage of funds is you can select the accumulation version, which automatically rolls the dividends back into your investment to help with the compounding mentioned earlier.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.