The Motley Fool

Here’s how I’d invest £20k in shares to achieve financial freedom

Source: Getty Images

If I invest £20k in shares, I reckon it’s enough to help me achieve financial freedom with those shares.

For example, many people quote a high-single-digit percentage figure as the likely annualised return from the general stock market. So, let’s assume an annualised return from share investments of 7%.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

I’d invest £20k and compound the gains

I like to plug figures into one of the several online compound interest calculators to see how annualised returns might compound over time. And I reckon the 7% figure is a realistic base assumption. The following table shows what investing £20k and compounding a 7% annualised return will give me over time.

And I reckon the figures show the dramatic effect that compounding returns can have on my investments. Indeed, the process of compounding leads to accelerating, exponential returns through the years. For example, after 11 years, my initial £20k investment will have produced more than £22k in total returns, doubling my money and then some.

After 40 years of compounding at 7%, I’ll be getting a return in one year that’s close to the initial £20k investment! And the final balance will be worth almost £300k.

Years invested

Return for the year (£)

Total returns (£)

Balance (£)

1

1,400.00

1,400.00

21,400.00

2

1,498.00

2,898.00

22,898.00

3

1,602.86

4,500.86

24,500.86

4

1,715.06

6,215.92

26,215.92

5

1,835.11

8,051.03

28,051.03

11

2,754.01

22,097.04

42,097.04

20

5,063.14

57,393.69

77,393.69

30

9,959.96

132,245.10

152,245.10

40

19,592.75

279,489.16

299,489.16

How I’d beat the effects of inflation

One fair criticism of illustrations like this is that £300k 40 years from now won’t seem as impressive as it does today because of the eroding effects of inflation. And that’s true. But £20k would not be my only investment in a lifetime of investing. Even if I started with £20k, I’d likely add more to my investments through the years. Indeed, my preferred option would be to invest money every month. And doing that would really turbo-charge those returns to produce a much larger pot of invested money in the end.

For example, the calculator tells me that adding £100 each month on top of the initial £20k investment would give me a final balance after 40 years of just over £584k. And I reckon a cool half a million is a decent outcome for what is a relatively modest financial commitment each month.

Another way to improve the outcome is to achieve an annualised return on investments higher than 7%. And like many other private investors, I’m aiming to achieve that by picking shares and funds carefully. Even small increases in the annualised return can multiply out into big differences in the final balance over time. And that happens because of the powerful effect consistent compounding can have. Indeed, compounding is the ‘secret’ of success for many successful investors such as Warren Buffett and others.

I think these five stocks could make decent compounding machines in my portfolio.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic…

And with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be daunting prospect during such unprecedented times.

Fortunately, The Motley Fool is here to help: our UK Chief Investment Officer and his analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global lock-down…

You see, here at The Motley Fool we don’t believe “over-trading” is the right path to financial freedom in retirement; instead, we advocate buying and holding (for AT LEAST three to five years) 15 or more quality companies, with shareholder-focused management teams at the helm.

That’s why we’re sharing the names of all five of these companies in a special investing report that you can download today for FREE. If you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio, and that you can consider building a position in all five right away.

Click here to claim your free copy of this special investing report now!

Kevin Godbold has no position in any 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.