The stock market crash may have made some investors more cautious about investing money in UK shares. The FTSE 100, for example, continues to trade over 20% lower than it did at the start of the year. It also faces an uncertain near-term outlook.
However, the track record of the stock market shows that it has the potential to turn modest amounts of capital into large portfolio valuations. Therefore, while stock prices are currently relatively cheap, now may be the right time to start investing £500, or any other amount, on a monthly basis in a diverse range of stocks. Over the long run, it could lead to a £1m portfolio.
The track record of UK shares
Even after the recent disappointing performance of many UK shares, the stock market has delivered relatively impressive returns over the long run. For example, the FTSE 100 has risen nearly sixfold since its inception in 1984. When reinvested dividends are added to that figure, it works out as an annualised total return of around 8%.
Assuming the same rate of return on a monthly investment could lead to a large portfolio in the long run. For example, £500 invested each month over a period of 25 years could be worth £480,000. Over a 35-year period it could be worth £1.15m. Therefore, sticking with the stock market instead of buying less risky assets could be a shrewd move for any investor who is seeking to build a nest egg in the long run.
Investing money today
Clearly, UK shares have not always produced returns that are in the high single-digits on an annualised basis. This year, for example, the index seems set to underperform versus its historic averages, with risks such as the US election and coronavirus continuing to cause a degree of caution among investors.
However, such periods occur relatively frequently. For example, the global financial crisis caused the FTSE 100 to lose over half of its value in a matter of months. Similarly, the dot com bubble in the early 2000s led to major declines for many shares. Other bear markets have taken place, while events such as market corrections and downturns occur fairly regularly.
For short-term investors in UK shares, such periods can be problematic. However, for long-term investors, they provide an opportunity to buy high-quality companies at even lower prices. This can lead to higher returns in the long run, with the stock market having an excellent track record of recovering from its various downturns to post new record highs.
By maintaining your regular monthly investment through difficult periods for the stock market, you can benefit from its long-term growth potential. It may even allow you to build a £1m portfolio during your lifetime as it recovers from its present challenges.
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.